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An Unemployment Reprise

An Unemployment Reprise

February 05, 2024

Most of you know that my oldest son, Shane, has been involved with musical theater for nearly 25 years, since his first production in which he was one of The Lollipop Guild members in The Wizard of Oz when he was eight years old. Since then, Shane has performed in dozens of musical theater productions of well-known Broadway shows throughout high school and college, where he double majored in music and musical theater. 

Source: Jesse’s iPhone 

Subsequently, Shane moved on to New York City and toured with a number of Broadway shows before moving to the other side of the curtain. He now serves as the Assistant Artistic Director of the Palace Theater in Manchester, New Hampshire. In this capacity, he directs, choreographs, stage manages, and does lighting design for the theater. Rachel and I will be going there in June to see their production of 42nd Street.

One of the staples of musical theater is the reprise. According to Wikipedia, this is where an earlier song or theme is repeated, usually with the lyrics changed and the music shortened to reflect a change in the direction or development of the storyline.

It seems like the reprise is not limited to musical theater. The Bureau of Labor Statistics also does multiple reprises or revisions to its unemployment statistics. And much like Broadway, these reprises can tell how the employment story is developing or changing direction.

Let’s take a look at this historically. In 2008, the economy moved toward the Great Financial Recession, which was exacerbated by the failure of AIG and Lehman Brothers. Data from the monthly unemployment report was released on the first Friday of the month by the Bureau of Labor Statistics; as the economy slowed dramatically and moved into recession, these numbers were later reprised to show the unemployment picture as being much worse than what was originally reported.

There has been a lot of attention focused on both the Federal Reserve Bank and the jobs market as the Fed raised interest rates dramatically over the last two years to combat rising and persistent inflation. Many economists have been expecting a recession to unfold in this environment.

However, as we look at our second chart, in 2023, you will note that revisions to the initial unemployment report have been negative in 10 of the 11 months reported through November. Could it be that the employment reprises are giving us a warning signal of a future slowdown in the economy, and particularly in employment?

As you can see from our first chart below, the initial unemployment release showed that the economy had created nearly 900,000 jobs from April 2007 to December 2008. However, the final reprise of these numbers shows that the economy actually lost 2.2 million jobs.

It is important to remember that unemployment is a lagging economic indicator. The unemployment rate often remains low as the economy slows and starts to move higher once we are in a recession. This is part of what makes the Fed's job so hard; they are looking at an economic data point that is firmly in the rearview mirror while trying to drive the economy through the windshield of what is coming.

Our final chart shows how quickly this could turn. Since 1948, as the economy moves towards the cycle peak, it is still, on average, producing nearly 180,000 jobs per month. This is consistent with the job creation we have seen over the last quarter of approximately 200,000 jobs per month. However, once a recession begins, the numbers can turn negative very quickly.

Job Market Can Turn Quickly

*Average monthly non-farm payrolls (NFP) change based on three-month historical average change (relative to cycle peaks as defined by NBER) as a percentage of total NFP adjusted for the current size of the labor force. Data as of Nov. 30, 2023, latest available as of Dec. 31, 2023.

Sources: BLS, NBER, and Bloomberg. Note: 1948-present; 2020 recovery excluded due to pandemic distortions.

Economists and market strategists have been expecting a recession for over a year. This is based on economic history, as well as a number of indicators that have historically been reliable predictors of a slowing economy. This was the consensus view as we started 2023, and it was either wrong or early. The consensus has now moved toward the view that we will have a soft landing, with the economy slowing but no major recession. The CFPs at Impel Wealth Management will continue to diligently watch the data to see where the economy is headed and if any moves would be warranted in our model portfolios as a result.

We thought this was an important story to tell. I bet most of you did not think that there was a parallel between Broadway reprises and revisions to the unemployment reports. You will be hearing much about the economy and jobs in the coming election cycle. We wanted you to have a historical context in which to evaluate the various viewpoints. As always, if you have questions about your unique situation, please do not hesitate to give us a call. We are here for you. 

© 2024 Jesse Hurst

The views stated are not necessarily the opinion of Cetera and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.

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