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By New_Deal_democrat June 7, 2016 10:59 am
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Labor Market Conditions Index forecasts further deceleration in jobs growth, but no recession

The Labor Market Conditions Index has suddenly got a lot of attention.  I happen to think that is because it has turned negative for 5 months now, attracting Doomer attention like moths to a flame, rather than because of any difference in its inherent value.



As I noted when I started covering the Labor Market Conditions Index last August, the LMCI shows promise as a long leading indicator, as 40 years worth of data shows it turning negative usually a year or more before the onset of a recession.  Typically it has fallen to a value of -10 or worse by the time a recession starts (although in 1980 and 2001 it was less than -5 but fell below -10 within several months after the onset of the recession).  In the graph below I am showing this by adding +10 to the value so that a -10 reading shows as 0: 







Further, please note that the LMCI fell to -5 readings in 1994 and 2002 without a recession occurring.  So the poor readings so far this year do not imply that we are in a recession now, and don't necessarily imply that it will continue to worsen.



The bad news is that the "less bad" readings from February and March that I noted last month in the below graph:







have been revised away.



Here's what the last 12 months look like now:







In addition to showing promise as a long leading indicator generally, the LMCI does a good job as a leading indicator specifically for YoY employment (red in the graph below):







Because the YoY measure of payrolls is such a non-noisy series, the continued deterioration in the LMCI strongly suggests that the 200,000+ payroll gains of a year ago are gone.  For the next 6 months, we should expect payroll reports of 1xx,000 on the high side, and 0 on the low side.



But not everything is negative.  First, the Conference Board maintains an Employment Trends Index which specifically aims to be a leading indicator for jobs.   Here it is:







It has basically gone sideways for the last 6 months.  This does not suggest actual job losses in the near future, but rather continued deceleration of positive growth.  Please note the only prior example of such sideways movement in the ETI in 1989 coincided with continued job growth.



Secondly, the American Staffing Index, which measures temporary jobs, has been trending less and less negative pretty much all this year, and finally just this week turned positive:







The Staffing Index turned negative 7 months before the top in the Temporary Jobs component of the Payrolls report last year.  If it continue to trend positive, that suggests Temp Jobs in the monthly Payrolls report will turn better as well.



Finally, at times like this it pays to step back, take a deep breath, and look at what the K.I.S.S. method of the simple Index of Leading Indicators tells us:







This Index telegraphed a big slowdown 6-8 months out last summer.  Unsurprisingly, it has arrived. What the Index has *not* telegraphed is any actual recession in the months ahead.







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