Figure 11-3: Employment’s lagging relationship to consumer spending (PCE)
Over many cycles, employment growth has proved to be a lagging indicator of consumer spending, typically peaking a year after consumer spending and bottoming six to twelve months after the trough in consumer demand.* It is evident in this chart that peaks and troughs in employment follow, rather than lead, those of consumer spending. Because of this, every economic recovery, in its early stages, appears to be a “jobless recovery.” Even though employment does have some secondary causality in driving consumer demand, it should never be used as a primary indicator in forecasting consumer spending.
*This reflects, logically, the fact that workers are hired as and after the economy improves and laid off as and after the economy deteriorates. Despite this, a surprising number of economists use employment as the dominant element in their forecasts of consumer spending.
Current Comment: Employment growth (green line) in 2009, not surprisingly, experienced its worst declines in the history of this chart. While this will have residual effects during the next several years, it is almost certain that employment will return to positive Y/Y comparisons by late 2010 resulting from (1) the modest uptrend in consumer spending with its salient effects on the general economy and (2) comparison with the deep employment declines of 2009. Regardless of the absolute level of employment (which will continue to be problematic), Y/Y gains in employment will likely provide a net plus to Y/Y economic comparisons in 2010.
