The US labour market: shifting risks require a broad assessment
Declining household survey employment is a striking contrast to nonfarm payrolls continued strength. The ISMs point to downside risks ahead.
Early 2024 has been a particularly interesting time for the US labour market. January’s nonfarm payrolls result was extraordinary at 353k. February’s print was also buoyant at 275k but came with a net -167k in back revisions to the prior two months, including a 124k downward revision (-35%) for January. Volatility of this scale makes relying on a single indicator dangerous, particularly at this point in the cycle.
This is why we continue to encourage a broad view of the US labour market, taking in all the information from the establishment survey (which provides nonfarm payrolls, hours and hourly earnings), the household survey (employment and measures of utilisation) as well as other wage indicators and the business surveys.
Even after February’s revisions are incorporated, nonfarm payrolls have averaged a gain of 265k the past 3 months – a strong outcome, modestly above the average of the past 12 months, 229k. In stark contrast however, over the year, average weekly hours are down 0.6%, leaving growth in aggregate hours worked at roughly half the payroll job gain (1.0%yr versus 1.8%yr).
We also know from the household survey that the count of multiple job holders is now back at historic highs. This is important because it means that the number of people employed has not necessarily increased by 1.8%yr as purported by nonfarm payrolls (a count of the number of jobs not individuals employed). The household employment survey instead puts annual growth in the number employed at just 0.4%yr – below the pace of population growth.
If we focus on a shorter time period, the household survey trend is much weaker, with essentially no net growth in employment from June 2023 to February 2024 and a 0.9% annualised decline since September 2023 – a period when nonfarm payrolls reported a 1.8% annualised gain.
With the establishment and household surveys offering starkly different views, there is need to assess each against other available data. We view the ISM survey employment measures as the best quantitative cross check. At February, the manufacturing and service ISM employment series were respectively 6pts and 4pts below their 20-year averages. Compared to the history of nonfarm payrolls, the ISM data suggests a -200k per month pace is currently more likely than the above +200k pace payrolls has been averaging.
The NFIB’s actual employment measure is more constructive than the ISM series as of January, but only broadly neutral versus history. This signal is consistent with the March Beige Book’s overall assessment of employment across the Federal Reserve districts, with employment rising “at a slight to modest pace in most Districts” over the survey period.
Anecdotes on labour supply similarly point to balance. From the Beige Book, businesses “generally found it easier to fill open positions and to find qualified applicants” while “several reports indicated a slower pace of increase” for wages.
Hourly earnings growth from the establishment survey was also soft in February at 0.1%, but this followed a 0.5% gain in January. The 3-month average gain is 0.3% or 3.6% annualised, materially below the current annual pace of 4.3%yr. 3-month average hourly earnings growth is also in line with December’s quarterly total compensation pace from the Employment Cost Index (ECI). This is significant as the ECI does not suffer from compositional change release-to-release as hourly earnings often do.
Our overall take from all available information on the US labour market is that growth in the number of individuals employed has, most likely, slowed to a pace below population growth and the utilisation of established workers is under pressure. With stable participation, the unemployment rate is therefore set to trend higher to around 4.5% end-2025, a percentage point above its cycle low and 0.6ppts above February 2024’s 3.9% but only marginally higher than estimates of ‘full employment’.
Whether immediate or with a few months delay, such an outcome will see household consumption growth soften and businesses become increasingly wary about the scale and timing of investment. GDP growth is therefore likely to slow below trend in coming quarters and remain there through much of 2025. Rising slack in the economy will consequently suppress any lingering cyclical inflation risks, particularly with the Beige Book already suggesting consumers are becoming “increasingly sensitive to price changes”.
The prime risk is that the ISM employment series prove an accurate lead, and a sustained period of labour retrenchment is seen. If this occurs, not only will the unemployment rate peak well above the ‘full employment’ level, but the period of sub-trend GDP growth forecast would likely prove deeper and potentially more persistent. Lowering the fed funds rate at a measured pace from June will help to mitigate these risks.
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