Last week’s jobs report was surprisingly weak: The estimated 38,000 jobs added during May marks the weakest month since September 2010, when the economy last lost jobs. It’s the weakest showing in the month of May since 2009, when the economy was still shedding hundreds of thousands of jobs per month. The report also showed more people wanted work than in the month before, and more people were working part-time but wanted full-time jobs. Those aren’t good signs that a streak of employment gains — which has been long, if modest in strength — is going to continue..
A broader measure of employment data, the Federal Reserve’s Labor Market Conditions Index, tells a similarly ominous tale. The index, developed two years ago with data going back to 1976, has fallen in each month this year, with the number getting progressively worse. I looked over the data to see if I could glean anything about trends and past indicators. There have been only eight other times in the data set when the index fell at least five straight months; half of them were followed by recessions.
Our current bad stretch doesn’t look as bad as those four pre-recession dips — yet. Those four lasted at least a little longer (between six and 12 months) and were more intense (with an average monthly index decline of at least 3.9 points, vs. the current average of 3 points). The intensity seems to be more predictive than the duration, but a) we’re dealing with a small sample size, and b) We’ll have to keep an eye on the LMCI over the next couple of months.
That said, the odds aren’t on our side. At 83 months old, the current expansion is well past the post-WW2 average of 58 months. It doesn’t help that it’s a presidential election year and there’s no incumbent. Also during the postwar period, there have been six previous presidential elections in which the incumbent wasn’t up for re-election (I included LBJ in ’64 and Ford in ’76 as incumbents, even though they hadn’t been elected to the presidency). Two of those six times, the election was held during a recession; two other times, a recession began within a year of the election; the other two times, a recession began within two years. It has been much less common for recessions to follow so soon after elections with incumbents, even if the incumbent lost.
But it doesn’t appear that changes in administration have sparked economic downturns. The opposite appears more likely.
Yes, the aforementioned recessions typically began after the election. But remember, declines in the LMCI have often foreshadowed recessions. In elections where the presidency changed parties* the LMCI tended to fall in the months before the election, even if a recession wasn’t already under way. The election-year LMCI through October fell an average of 6.8 points per month in years when the White House changed party hands. In years where a party kept the White House, it rose by an average of 4.3 points.
To repeat: This year’s average so far is minus-3 points.
Is that a function of businesses sensing a regime change is in the works, fearing the unknown, and shedding workers as a result? Or it a matter of voters feeling the downturn before a recession is officially declared — remember, these declarations by definition don’t come until a recession is more than six months old — and voting accordingly? I don’t know.
Nor do I know whether this year’s declines reflect the possibility of Donald Trump’s becoming president, or whether his electoral fortunes are being buoyed by a weak economy. Either way, election-year weakness in the economy could help him defeat Hillary Clinton. That would be more than a bit ironic for those of us who think Trump’s economic policies could be bad for the country.
* This is not the same thing as an incumbent losing; Republicans taking the White House from Democrats in 2000 also counts.