Markets and Economy

Key Indicators in a Time of Full Employment

Recent reports show consumer demand slowed over the winter, and many observers are now drawing worried conclusions about the future of the expansion. But demand indicators can be volatile; the labor market is still providing the most reliable insights into economic health.


Recent reports show consumer demand slowed over the winter, and many observers are now drawing worried conclusions about the future of the expansion. But demand indicators can be volatile; the labor market is still providing the most reliable insights into economic health.

Public impressions about the state of the economy tend to come from high-frequency indicators of consumer demand—such as retail sales, housing sales and starts, durable goods orders and motor vehicle sales. Such nowcasting, which uses these indicators to extrapolate broader economic theories, has become the latest trend for tracking GDP—but it’s also inherently prone to noise, distortion and volatility.

For example, most estimates of consumer activity suggest that sales growth slowed over the winter. Now, many observers are concluding this means the national economy also could be slowing down—even though these indicators only represent a small slice of the economy.

As in the past, the labor market is still providing the most accurate, comprehensive and timely measure of economic momentum. As job creation slows to a sustainable pace over the coming months, layoffs and the headline unemployment rate will be the most reliable gauges of economic health. 

Taking Inventory

Monthly GDP estimates show that aggregate production continued to grow in January, expanding by 0.7 percent despite slower consumer spending and falling government outlays. This likely means that businesses believe the winter’s demand-side slump will prove transitory. Bad weather, a prolonged federal shutdown and stock market volatility may have contributed to consumers pulling back on big-ticket purchases.

Given the cost of adjusting production and logistics schedules, businesses may have decided to keep production steady over the winter, confident that consumer demand will soon return. It wouldn’t be surprising if first-quarter GDP estimates show growing inventories offset softening retail sales.

Jobs: The Original Nowcast

Nowcasting can miss important shifts in the retail landscape, and inventory data is too sparse to make comprehensive valuations.

Labor market indicators cut through the noise. Hiring decisions are based on businesses’ long-term outlook, not transitory factors. And layoffs can provide a timely, accurate and comprehensive measure of distress, since employers are often reluctant to make staffing cuts unless absolutely necessary.

March’s jobs report shows the economy maintained an above-trend pace of expansion; the 196,000 new jobs vastly outpaced the underlying growth of the nation’s workforce. With most indicators already showing the economy in full employment territory, the pace of job creation is likely to downshift in the near future. But as long as unemployment and layoffs remain low, the economy could still be operating near its full potential.

The Hiring Lifecycle

At nearly a decade old, the current expansion is one of the longest in history, and above-trend growth has started to seem normal. But the labor market is finally drawing tight, and the current pace of hiring—an average of 211,000 new jobs created every month over the past year—likely won’t be sustainable for much longer.

As the final pockets of labor market slack are absorbed, the pace of hiring will likely slow to match the 65,000 new workers entering the labor market every month. The past decade’s above-trend job creation has been fueled by a large population of long-term unemployed workers, but their numbers have finally returned to the pre-recession lows of 2007. The labor participation rate among young adults implies that only about half a million workforce dropouts are available to return to the job market—a population that could vanish entirely in a matter of months.

Approximately 4.5 million involuntary part-time workers could potentially move into full-time positions as they become available, but even at the peak of past business cycles, involuntary part-time employment has rarely fallen below current levels. Similarly, around 1.3 million fewer teenagers are in the workforce today, but their absence may be due to structural shifts in education and extracurricular demands, not a lack of after-school job opportunities.

Some skeptics point to the overall employment-to-population ratio, which implies 7 million Americans have left the workforce over the past decade. The truth is, most of these missing workers have simply retired. The population of 55- to 70-year-olds—the age group most likely to exit the workforce—has grown by 17 million over the past decade, while the population of 15- to 35-year-olds entering the workforce has grown by only 6 million.

Among those who move after retirement, many seek rural communities for the low cost of living; relatively few retirees choose to relocate to expensive urban housing markets once they no longer need to commute to work. This helps explain why the employment ratio has dropped further in rural areas than cities.

Leveling off or Losing Steam?

As the labor market tightens, hiring will naturally slow. At that point, layoffs and the headline unemployment rate will be the most reliable barometers of economic health—not retail sales or other measures of consumer demand. If the hiring slowdown is accompanied by a surge of unemployment insurance applications, that would be a sign that businesses are starting to see conditions deteriorate. However, if unemployment remains low while hiring tapers off, that would indicate the economy is successfully holding the high ground and maintaining full employment.

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Jim Glassman, Head Economist, Commercial Banking

Jim Glassman

Jim Glassman, Head Economist, Commercial Banking

Jim Glassman is the Managing Director and Head Economist for Commercial Banking. From regulations and technology to globalization and consumer habits, Jim's insights are used by companies and industries to help them better understand the changing economy and its impact on their businesses.

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