UK payrolled employment rose solidly again in November, while pay growth numbers for October surprised to the upside. It has been suggested that this news reinforces the case for a Bank rate hike of at least 50 bp this week. 

Employment is a lagging economic indicator. There is ample coincident evidence that a recession is under way. Annual broad money growth – as measured by non-financial M4 – is down to 3.4%, a level suggesting a medium-term inflation undershoot. The view here is that any rate rise this week will be a mistake. 

The monthly payrolled employment measure has a short history but it correlates closely with the quarterly (and less timely) Workforce employee jobs series. In the 2008-09 recession, the latter measure peaked two quarters after GDP.

Labour market indicators that lead employment / unemployment include the stock of vacancies and average hours worked. These indicators are usually roughly coincident with GDP.

The headline vacancies series is a three-month moving average but non-seasonally-adjusted single-month numbers are available and can be adjusted using a standard procedure. The resulting series peaked in April, one month before GDP, and fell again in November – see chart 1. The recent pace of decline is comparable with the 2008-09 recession.

Chart 1

The weak November vacancies number suggests that GDP contracted significantly last month after October’s catch-up from reduced September activity due to the Queen’s funeral.

Average weekly hours tell a similar story. The series, which is available only as a three-month moving average, peaked in March and fell again in October, reaching its lowest level – excluding the pandemic recession – since 2012.

Should the MPC react to strong pay numbers? The monetarist view is that pay pressures are an effect rather than a cause of high inflation and will moderate as the dramatic slowdown in money growth since 2021 feeds through to slower price rises.

The latest upside surprise, in any case, reflects a belated catch-up in public sector pay; six-month growth of private sector regular pay is high but moving sideways – chart 2. A public sector pay pick-up may be bad news for real government spending and / or the public finances but will have little effect on the pricing behaviour of private sector suppliers of goods and services – especially against a backdrop of deepening recession and a loosening labour market.

Chart 2

Revised numbers confirm that US GDP fell by 0.6% (1.1% annualised) between Q4 2021 and Q2 2022*. Hours worked in the private sector economy, meanwhile, climbed 1.1% (2.2% annualised) over the same period. What explains this disconnect and how long can it continue? 

The ”explanation” here is that economy-wide productivity was pushed far above trend by the pandemic but has been normalising this year. The reversion to trend appears complete, suggesting that labour market data will reflect output weakness going forward.

Output per hour in the business sector surged in the initial stages of the pandemic in Q2 / Q3 2000, opening up a gap of more than 4% with the prior trend – see chart 1.

Chart 1

Firms responded to economic contraction by laying off lower-productivity workers, boosting the average. Output returned to its pre-pandemic level in Q2 2021, requiring these jobs to be refilled. A fall in participation (due to age demographics) coupled with supply / demand mismatches slowed the rehiring process, resulting in output per hour remaining elevated until recently.

The deviation from trend had narrowed to below 1% as of Q2.

Another way of presenting the data is to compare actual hours worked in the business sector with the number implied by the current level of output, assuming that productivity had continued on its pre-pandemic path – chart 2.

Chart 2

A big deficit had opened up by Q2 2021 but strong employment growth and an output set-back have narrowed the gap. Monthly data through August suggest that hours worked rose solidly again in Q3 and may have converged with the output-warranted level.

With productivity back or close to trend, the GDP / employment divergence is likely ending.

The productivity trend implies that hours worked will fall if GDP rises by less than 0.2% (0.8% annualised) per quarter. Real narrow money has been contracting since January 2022, suggesting further GDP declines in Q4 / H1 2023. Labour market data may be poised for imminent deterioration.

*Gross domestic income – GDP measured from the income side – rose by 0.2% (0.4% annualised) over the same period.

The UK labour market has recovered impressively but isn’t at risk of “overheating”, as claimed by economists quoted in write-ups of this week’s data.

The number of payrolled employees is at a record but this partly reflects a large number of self-employed people switching to employee status during the pandemic. The comprehensive Labour Force Survey measure of employment remains 600,000 below its peak – see chart 1.

Chart 1

The unemployment rate for the 16-64 age group of 4.2% is almost back to its pre-pandemic low of 3.8% but has been suppressed by a rise in inactivity, which is 1.2 pp higher as a share of the labour force, i.e. the jobless rate would be 5.4% if inactivity had remained stable – chart 2.

Chart 2

High inflation is putting upward pressure on wage settlements but the six-month growth rate of regular earnings (i.e. excluding bonuses) is currently no higher than in mid-2019, at 3.7% annualised – chart 3.

Chart 3

Weak / negative real money growth is likely to be reflected in a loss of economic momentum, implying labour market cooling – chart 4. Vacancies lead and may be peaking – chart 5.

Chart 4

Chart 5