Are unemployment numbers hiding the true state of the economy?

by Sean Tweedie and Trent Wiseman | January 30, 2024

According to the US Treasury Secretary Janet Yellen the US economy is entering a soft landing following a sustained period of low inflation and rising wages. A soft landing occurs when an economy shifts from a growth phase to a slow growth or potentially flat growth phase without entering a recession. It is a very unusual, and mostly theoretical event where high inflation is brought to heel without causing any considerable damage to the labour market.

The argument for a soft landing is due to the fact that US inflation has decreased from over 9.0% to 3.40% in January of 2023. All the while the unemployment rate has remained steady below 4.0% since 2022. However, using the unemployment rate as a gauge for the strength of the U.S labour market is not without its problems as the unemployment rate is a lagging economic indicator. As such the unemployment rate can provide a misleading picture of the true strength and resilience of the labour market. As Figure 1 shows, when an economy is operating at full employment, falling labour demand will normally translate to slower wage growth and lower job openings as opposed to higher unemployment. This relationship was evidenced in the U.S in 2023, where inflation decelerated, and job openings fell without a big increase in unemployment. Therefore, using a leading economic indicator can often provide a more accurate picture of the current state of the labour market and where it could be heading.

Figure 1

BCA Research’s analysts highlight a few leading indicators that show that the labour market may not be doing as well as many think. The first of these is the monthly Job Openings and Labour Turnover Survey (JOLTS). As shown in Figure 2 the JOLTS data suggest that job openings are trending lower. The second indicator  is temporary employment. Temporary employment has been shifting consistently lower since March 2022. This decline is a concern as temporary employment has dropped in the lead up to the recessions in 1990, 2001, and 2008. A third indicator is average weekly hours (the average number of hours worked by production and nonsupervisory employees). In the U.S average weekly hours figures for December reached its lowest level since April 2020.

Figure 2

These leading indicators show that, despite an undoubtedly resilient unemployment rate figure, the labour market in the U.S is slowing down and may not be as strong as intimated by the Treasury Secretary. If the unemployment rate follows the trend of the leading indicators there will be a recession, likely in the second half of 2024. This can be seen in Figure 3 which shows that post 1945 an increase in the unemployment rate always precedes a recession. 

Figure 3

There is a similar trend globally amongst developed nations whereby the unemployment rates have remained steady, however, there are indications that the labour markets in these economies are also cooling. In Europe the job vacancy rate remains elevated. In the UK job vacancies have fallen, while PMIs are forecasting employment cuts. In Canada the unemployment rate is slowly starting to rise after the economy lost 23,500 jobs in December. Australia also lost over 65,000 jobs in December, however the unemployment rate held steady at 3.9%. This was because the labour force participation hit a record high of 67.3%.  

Even if labour demand begins to tick up again due to stabilisation in global manufacturing, central banks will be wary of cutting rates too quickly and spurring on a second wave of inflation. The risks of further inflationary pressures are now heightened due to the attacks on cargo ships in the red sea forcing many shipping companies to redirect their ships via South Africa. Considering the significant challenges central banks faced due to the sudden surge in inflation in 2021, it is likely that they will be more conservative in their cutting cycle. They are likely to implement substantial interest rate cuts only when unmistakable indications of an imminent recession become evident, foregoing the elusive soft landing.

All of this uncertainty has a significant impact on the volatility in the financial markets and the foreign exchange market in particular.

How are you managing this volatility? Connect with us to hear how we can assist. Contact Dale Petersen on 021 819 7802 or at


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