Unemployment line.

Photographer: Mark Ralston/AFP/Getty Images

This Job Market Slump Started a While Ago

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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The sharp May hiring slowdown revealed in Friday’s employment report took a lot of people -- including me -- by surprise. It shouldn’t have. Things have actually been on the downswing for the U.S. labor market for months, according to the Federal Reserve’s Labor Market Conditions Index.

The LMCI is a new measure cooked up by Federal Reserve Board economists in 2014 that consolidates 19 different labor market indicators to reflect changes in the job market. They calculated it going all the way back to 1976; the chart above shows its movements since the end of the last recession in June 2009. The May index, released Monday morning, showed a 4.8-point decline from April. As you can see from the chart, the index has now declined for five straight months -- its worst performance since the recession.

The index does get revised a lot. When the January number was first reported on Feb. 8, for example, it was still modestly positive. Still, since the February number was released on March 7 the news from the LMCI has been unremittingly negative. Which probably should have told us something.

Not many people were paying attention, though. Fed Chair Janet Yellen is apparently a fan of the LMCI, but I have to admit that I first learned of its existence Monday when Erica Groshen, the Commissioner of the Bureau of the Labor Statistics, mentioned it at a conference for BLS data users in New York. It was a good reminder, as were a lot of the other presentations at the conference, that the headline jobs numbers that get the lion’s share of attention -- the monthly change in payroll employment and the unemployment rate -- aren’t always the best places to look for information on the state of the jobs market.

One of the indicators included in the LMCI, for example, is employment in temporary help services, which tends to start rising and falling before overall employment does. Well, watch out: It looks like it may have peaked in December.

Another LMCI indicator is the labor-force participation rate -- the percentage of 16-and-older civilians who are either working or actively looking for work.

The participation rate been mostly on the decline since 1999, a phenomenon that has been the subject of much worried commentary. In October, it began what looked to be a significant rise. Then, in April and May, it began falling again.

This decline in labor-force participation was a key reason why the unemployment rate dropped to 4.7 percent in May. So the fall in unemployment wasn’t necessarily good news. In fact, it wasn’t necessarily news at all -- it could be mostly statistical noise. “We’re just waiting around to see what really happened,” BLS Assistant Commissioner for Current Employment Analysis Julie Hatch Maxfield said this morning.

As are we all. Though the signals coming from the U.S. labor market have been mostly negative for several months now, according to the LMCI, they’ll have to get much worse before it indicates that the economy is falling into a recession. Still, this is clearly more than just one off month.

(Corrects spelling of BLS commissioner's name in fourth paragraph.)

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor responsible for this story:
Susan Warren at susanwarren@bloomberg.net