I believe that the health of an economy is reflected in the employment growth rate of that economy. When demand for products and services increases, companies hire employees to meet that growing demand. When the reverse happens, companies slow down their hiring and maybe even lay off employees.
Earlier today, the US Bureau of Labor Statistics released its monthly employment report. Those that follow Financial Slacker, know that I track, analyze, and sometimes comment on this highly anticipated monthly report.
I use this data to gauge where I think the economy is headed. I primarily look at the year-over-year growth percentage each month. And I prefer non-seasonally adjusted total private employment, excluding federal, state, and local government employees. Many in the mainstream media will focus more on unemployment. And although unemployment is important, it is really a measure of capacity not economic growth. Alternatively, private sector employment growth is an indicator of the overall level of current and near-term corporate economic activity.
Employment Growth Lowest Since 2013
For the month of May 2016, non-seasonally adjusted total US private employment was 122.1 million, which is up 2.3 million, or 1.9% year-over-year from May 2015. Month-over-month, May was also up from 121.4 million reported in April 2016.
The good news is that the US continued adding private sector jobs. The bad news is that the US added jobs more slowly than last month. In fact, year-over-year growth in the month of May was the lowest level since March of 2013.
If you look at this more recent data, since we emerged into positive growth territory in Aug 2010, we have generally been hovering in the 2% to 2.5% range every month since. We are in one of the longest periods of sustained year-over-year job growth in history.
This month, we saw a drop in the employment growth rate below 2%.
Employment Growth Over the Past 30 Years
For a longer term perspective, if you look back at the data over the past 30 years you can see some very interesting trends.
As I discussed in a prior article, you can clearly see from the chart, over the past 30 years, we have had three periods where total private employment growth was negative:
- 12/90 – 3/92 (16 months)
- 7/01 – 11/03 (29 months)
- 4/08 – 7/10 (28 months)
The first period marked the Gulf War. The second, the attacks on 9/11. And the third, the great housing recession. Although interestingly, the decline in 2001 actually began before 9/11 and dropped below zero in July prior to the attacks. But I’m sure the attacks pushed the declines into record low territory. In 2009, we had three consecutive months of -5.9% year-over-year declines – by far the worst we have seen.
Also over the past 30 years, we have had a number of periods with 3% or better year-over-year growth:
- 10/87 – 4/89 (19 months)
- 3/94 – 6/95 (16 months)
- 3/97 – 5/97, 9/97 – 4/98 (11 out of 14 months)
Unfortunately, we haven’t seen anywhere near 3% growth since then. In fact, after 9/11, we didn’t see 2% growth again until midway through 2005. A growth rate of 2.6% appears to be the new ceiling.
What Should We Expect Going Forward?
History shows that we cannot maintain a sustained high growth level indefinitely. We saw the peak at 2.6% in February last year and have been trending downward ever since.
I don’t want to preach doom and gloom, but based on a number of anecdotal perspectives, I would say we are slipping towards a downturn in the economy. In a recent article, I discussed a number of concerning factors that support this view.
Although still positive, employment growth is trending downward. The stock market started off the year with a significant correction as oil prices plummeted. It has since recovered, but many feel it may be over-valued. Housing prices are again at a peak since the 2008 recession. And we have political instability with the upcoming 2016 Presidential election.
In an environment of uncertainty, it’s worthwhile to consider a few defensive actions such as the following:
- Increase your emergency fund. During a downturn in the economy, having a larger cash allocation than normal isn’t a bad idea. Not only does this give you liquidity if you need it, but it limits losses you may incur in a market correction. I am not suggesting that you begin selling assets, but instead maybe hold-off putting additional money into the market.
- Expand your income sources. Diversified income sources is important in any environment. In a downturn, it’s even more important. Start a side business or two. If you are contemplating leaving your job, take some time to reconsider. Although economic downturns often create opportunities for smaller, more dynamic companies to change directions and make great leaps forward.
- Maintain or even reduce your expenses. If you’re thinking about making a big purchase, be cautious. Now may not be the best time to buy another car. I tend to feel most comfortable minimizing my fixed expenses. Try to keep mortgage payments and other debt payments as low as possible.
- Refinance your mortgage. If you have a fixed rate mortgage, this might be a good time to consider refinancing into an adjustable rate. With property values at their highest level in years and rates at their lowest, you may not ever find a better time to refinance. And if you can reduce your monthly cash outflow, you’ll be in a better position if things get tight.
- Take advantage of underpriced securities. The great thing about a declining market is the buying opportunities it presents. Value investing requires finding companies trading below their intrinsic value. In a rapidly growing economy, finding these opportunities can be difficult. Keep on the lookout for underpriced opportunities in markets that have been negatively impacted.
Obviously I don’t have a crystal ball. Predicting how the economy and how the markets will perform is pretty difficult. And in fact, the US Federal Reserve has indicated they will be raising interest rates over the coming months which is typically an indicator that they feel that the economy is over-heating and they’re worried about inflation. But undertaking the above defensive actions probably won’t hurt even if the economy goes in the other direction.
Readers, do you change your behaviors when you think the economy may be headed in a certain direction? What other actions do you suggest?