Job Market Tipping Point: Three Key Indicators to Monitor

Since July, our monthly house views and featured charts have highlighted a notable shift in market focus from inflation to employment data, amid mounting signs of a slowing labor market in the U.S.

We’ve also emphasized that as economic vulnerabilities and recession risks grow heading into 2H2024, the stock market has become increasingly sensitive to economic data. This article examines recent nonfarm payrolls figures and highlights the top three indicators for assessing whether the labor market is flashing recession signals.

I. U.S. Nonfarm Payrolls Miss Expectations, Previous Data Revised Downward

The latest jobs report shows that nonfarm payrolls increased by 142,000 in August, below the expected 164,000, but up from 89,000 in July. The number of workers unable to work due to bad weather and the number of workers on temporary layoff both declined from elevated levels in August, suggesting improvement in job growth as short-term hurricane disruptions subsided. Meanwhile, the Current Population Survey (CPS), also known as the household survey, reported an employment growth of 168,000. Also, driven by a drop in temporary unemployment, unemployment fell by 48,000 and the unemployment rate dipped slightly to 4.2% (prev. 4.3%), ending the trend of rising unemployment rate that had persisted since the beginning of the year.

While the report offers some positive news, it’s also crucial to note that nonfarm job gains for June and July were revised down to 118,000 and 89,000, respectively. This brings the three-month average down to 116,000, indicating growing fragility in the labor market. Other data points, such as the nonfarm employment diffusion index consistently declining and falling below 50, and the proportion of states with rising unemployment rate exceeding 50%, further confirm a broad-based slowdown in the labor market.

II. Main Driver of Labor Market Weakness: Job Openings-to-Unemployment Ratio Nearing 1

Why is the labor market showing signs of weakness? The primary reason is that labor supply and demand are back in balance. Looking at the Beveridge curve, which plots the unemployment rate against the job openings rate, a job openings-to-unemployment ratio of 1 serves as the dividing line. Along the steep section of the Beveridge curve, this ratio is above 1 (labor supply falls short of demand), and a job market softening will primarily be reflected in a decline in the job vacancy rate. When the ratio is below 1 (labor supply exceeds demand), the curve flattens, and further weakening in the labor market is marked by a rapidly rising unemployment rate.

1. Steep section: The job openings rate is higher than the unemployment rate, indicating excess labor demand, which was the case in 2022 and periods marked with pink dots in the chart.

2. Flat section: The job openings rate is lower than the unemployment rate, indicating an oversupply of labor, marked by the dark green dots in the chart, including the period post the 2008 financial crisis.

The job openings-to-unemployment ratio currently stands at 1.07, nearing 1. This means there is approximately one job opening per unemployed person, placing the labor market in near-perfect balance. This balance also suggests the labor market may soon tip into oversupply, which is why Fed Chair Powell repeatedly emphasized that further cooling in labor market conditions is unwelcome, and has explicitly signaled a September rate cut. Powell even expressed that that the Fed will do everything it can to support a strong labor market.

Top 3 Job Market Indicators to Monitor in 2H 2024

Will the ongoing labor market weakness persist and worsen? To answer this question, we recommend tracking three key indicators. Alongside are the trends and thresholds to watch for below. Users can bookmark these charts and easily monitor the latest developments in their personal dashboard.

1. Employment Diffusion Index: whether the index continues to stay below 50
2. Percentage of States with Rising Unemployment Rate: whether the percentage continues to remain above 50%
3. Nonfarm Payroll Growth: whether monthly gains will bounce back to at least 180,000 to ensure an annual gain of 2 million jobs, which is considered a safe threshold

1. Will the employment diffusion index continue to stay below 50?

The employment diffusion index published by the Bureau of Labor Statistics (BLS) measures the dispersion of job growth across industries. A reading above 50 indicates more industries are adding jobs than losing them, while a reading below 50 means more are seeing decreased employment. Historically, a level below 50 has been a crucial red flag for a potential recession.

In August, the diffusion index over the 3-month span fell below 50 for the first time in four years, dropping to 49.8. From here on, it’s crucial to monitor whether the index remains below 50 to confirm further deterioration in the labor market.

2. Will the proportion of states with rising unemployment stay above 50%?

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