US Labour data came out much lower that thought

Estimated reading time: approximately 4 minutes

Misinterpreting the recent “US Labor market report” is easy due to the frequent distortions caused by “seasonal adjustments” in Non-Farm Payroll (NFP) numbers. On February 3rd, the NFP data actually reflected weakness, not strength, as a result of a one-time adjustment of 810,000 people introduced by the 2023 population control effect.

Therefore, considering these data as evidence of a hawkish response by the Fed would be a mistake. On the other hand, some “leading indicators” support the hypothesis of a “soft landing” of the US economy, although this is not yet our primary scenario.

It is natural to wonder how to gain an understanding of the true health of the US Labor market. Unfortunately, we won’t have solid, reliable data for several quarters from  the BSL. However, we can turn to several leading indicators to gain insight.

Fortunately, we can gain an understanding of the real-time health of the US Labor market through a number of “leading indicators:

  1. One such indicator is the “rate of change in the hiring of temporary workers,” which precedes the rate of change in NFPs (Non-Farm Payrolls) by few months. This makes sense: in periods of rapid growth companies first hire/fire temporary workers as their contracts are more flexible. Only after that do they make structural decisions about their permanent staff. Over the past 12 months, the YoY pace of hiring temporary workers has rapidly declined to zero and historically, this means that Non-Farm Payrolls will follow in the same direction in the next 3-6 months.
  2. Another useful real-time gauge of the US Labor market is the “Challenger Job Cut announcements.” This series tracks involuntary job separations initiated by the employer and provides a good pulse check for the job market. Additionally, it offers a cross-sector analysis. In January, job cuts in tech, retail, real estate, and construction industries reached multi-year high levels, signalling potential challenges for employment.

The overall trend for the Labor market appears to be heading towards weakness. Nevertheless, the possibility of a “soft landing” of the economy is becoming increasingly incorporated into market expectations, and the markets may appear comfortable with this scenario, as a superficial analysis of macroeconomic data appears to support this narrative, at least for the time being.