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. This suggests that 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 economist use employment as the dominant element in the forecasts of consumer spending.
Current Comment: Employment growth (green line) in the 2003-2006 recovery was in line with, to somewhat less than, in past recoveries and, as always, followed the upward path of consumer demand—the economy’s key driver. As year-over-year growth in real consumer spending had fallen, with ancillary effects on industrial production, services, and capital spending, employment growth also fell from late 2006 through 2008, employment growth also fell sharply, to year-over-year declines as of late 2008. We may expect employment statistics look poor well past the trough of consumer spending that may occur in late 2009 and 2010. As always, savvy economic observers and investors should disregard this lagging indicator in forecasting economic direction.
