Tuesday, December 13, 2011

Employment Growth Already Stalled

Recessions and stock market downturns always have stalled or falling employment. Employment falls because demand has fallen, revenue is down, inventories are up so production/purchasing must fall. That means less employment.

I have previously written about falling building approvals and noted that "as go building approvals, so goes the economy" (generally speaking) and shown the fall in building approvals.

Employment growth has now stalled. The rate of growth in full time workers on a "change on same month last year" basis is effectively zero for November. Rarely does full time employment  stall without going negative. unemployment can be stable while growth in employment slows, but because of population growth and demographics, once it slows below the growth in the workforce, unemployment grows too.

My focus is on employment rather than unemployment because growth in the number of people working is the best indicator of likely growing GDP. This can be seen by looking at US growth in spite of still very high unemployment because employment has been growing for well over a year. Growing unemployment adds to the concern but you can have employment growth without falling unemployment because of workforce growth.

Two charts show the need to focus on the cycles of full time employment growth. (The pattern for total employed persons including part time workers is very similar). The first is persons employed full time. It shows a barely perceptible flattening over the last few months, partially obfuscated by monthly noise and seasonal changes.

The second shows growth from the same month last year which does away with seasonal noise and highlights the cycle more dramatically.

 The significant correlation of growth in employment slowing from around 3% or more and breaking down through the moving average and the commencement of significant stock market downturns is obvious. Upturns breaking through the moving average has also been a significant indicator of a major upturn in the stock market although a much shorter moving average would likely provide a more timely signal of upturns.

It may be that once employment growth falls through -0% you should be watching for buy signals (including very bad 2 month performance and a significantly oversold market) although with the risk of being whipsawn. In general purchases on a buy signal after a fall of more than 18% and then being "buy and hold" are more successful within 12 months than selling again, but of course there are some notable exceptions where the market has fallen 50%, but there have sometimes been multiple whipsaws costing say 20% of the fall. Most bear markets don't stay below 15% for very long.

My next post will look at changes in relative yields between stocks and 10 year bonds and also between 10 year and 3 month government securities. Looking at the signals from those relativities together with the employment signals will provide some very useful, but not perfect, timing signals. 1987 was unusual in that employment growth did not go negative although there was a very obvious trough. Mid 1999 and mid 2006 troughs were less significant.

These two posts could be read together with the post on market tops and bottoms for further indication of whether it is likely a good time to increase of decrease exposure to the stock market when clear price signals are given  eg moving average directions, moving average crosses, breach of trailing buys and sells (Turtle Trader" "style signals).

Both charts above are derived from Australian Bureau of Statistics (ABS) 6202.0 - Table 12. Labour force status by Sex - States and Territories.

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