The Labor Market Conditions Index for June Remains Negative

wall-street-etfDoug Short:  Despite last week’s favorable jobs report, today’s update of the Labor Market Conditions Index remains negative.

The Labor Market Conditions Index (LMCI) is a relatively recent indicator developed by Federal Reserve economists to assess changes in the labor market conditions. It is a dynamic factor model of labor market indicators, essentially a diffusion index subject to extensive revisions based on nineteen underlying indicators in nine broad categories (see the table at the bottom for details).

The LMCI is a relatively recent indicator developed by Federal Reserve economists to assess changes in the labor market conditions. Today’s release of the June data came in at -1.9, up from an upwardly revised -3.6 in May (previously -4.8). The cumulative index (discussed below) peaked six month ago in December 2015. Investing.com had forecast a flat 0.0.

The indicator, designed to illustrate expansion and contraction of labor market conditions, was initially announced in May 2014, but the data series was constructed back to August 1976. Here is a linear view of the complete LMCI. We’ve highlighted recessions with callouts for its value the month recessions begin and for the latest index value.

Labor Market Conditions Index

As we readily see, with the exception of the second half of the double-dip recession in the early 1980, sustained contractions in this indicator is a rather long leading indicator for recessions. It is more useful as a general gauge of employment health. Note that in the most recent FOMC minutes for April 26-27, the phrase “labor market conditions” was used thirteen times. Maximum employment, after all, is one of the Fed’s twin mandates.

Interestingly enough, the FEDS Notes article announcing the indicator doesn’t chart the complete series with monthly granularity. Instead, the authors use a column chart to show blocks of six-month averages for the two halves of each calendar year since 1977. This approach further supports the use of the indicator as a general gauge of health. Here is our larger version of the same graphic model.

Labor Market Conditions Index 6-Month Blocks

We couldn’t resist the urge to create a chart of the more conventional six-month moving average of the indicator. Note that we’ve adjusted the vertical axis to capture the depth of the contraction during the last recession.

Labor Market Conditions Index 6-month Moving Averages

As all three charts above illustrate, labor market conditions have been weakening. The LMCI hit its interim high in April 2014 and its six-month MA high four months later in August of that year

The Cumulative Labor Market Conditions Index

The next chart is a calculation of the cumulative value of LCMI (each month is the sum of all previous months). We’ve highlighted the peaks and recession starts. The cumulative value peaked anywhere from 3 to 17 months prior to the five recessions during the time frame of this indicator.

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