Watch the Private/Total Payrolls Spread — Evening Brief – 11.25.24
The labor market has generally shown resilience in 2024, with robust job creation and low unemployment rates based on conventional metrics such as nonfarm payrolls, unemployment rates, and labor force participation. However, alternative indicators suggest some potential concerns heading into 2025.
The year-over-year trend in private payrolls compared to total nonfarm payrolls is usually positive and provides valuable insights into the labor market, as private sector hiring dominates overall employment versus the smaller role of government jobs. Private payrolls account for about 85% of total payrolls, emphasizing their significance in driving the business cycle. As a result, you can learn a lot by comparing the one-year trend in private versus total jobs.
When the spread between private and total payrolls turns negative, as it has been for 19 consecutive months, it typically indicates economic weakness or a potential recession. This phenomenon occurs because private payrolls, which are more sensitive to economic conditions, contract more significantly during downturns than government payrolls, which remain relatively stable.
Yet, despite the negative spread, the economy is projected to maintain its respectable growth trajectory through the fourth quarter of 2024. This highlights the potential limitations of relying solely on the private-to-total payrolls spread as a recession indicator in unique economic environments, such as the current post-pandemic recovery and high-interest rate period.
The contrast between labor market warnings and a thriving economy suggests a nuanced economic environment: the labor market is normalizing from post-pandemic extremes, and while risks are elevated, they have not yet translated into a recession.
The macroeconomic disruption caused by the pandemic has clearly increased the volatility in certain indicators and business-cycle analyses. This further justifies the need to assess recession risk using a comprehensive array of indicators.
While the weak private-to-total payroll spread does not yet point to an immediate economic downturn, it highlights vulnerabilities in the labor market that bear watching. The precise triggers and timing of these vulnerabilities remain uncertain, but they underscore the transition from a post-pandemic boom to a more subdued phase of the labor market cycle.
The private-to-total payroll spread could serve as an early warning signal for potential economic challenges in 2025 if it remains negative without a rapid rebound, particularly if the weakness extends or deepens across sectors.