Labour Market Cycle Analysis

The Signal Cascade

Labour markets follow a predictable chronological sequence when turning. Employers first reduce hiring demand (JOLTS openings, quits), then cut hours, then layoffs appear in claims data, payrolls weaken, and finally the unemployment rate rises. This cascade creates a 6-12 month lead from first signal to headline unemployment.

Individual Indicators

1. JOLTS Job Openings (Leading Demand)
The number of unfilled job postings reflects employer demand for labour. A declining trend signals that firms are pulling back on hiring plans before actual layoffs occur. Published monthly by the Bureau of Labor Statistics with a ~2 month lag. Available since December 2000.

2. JOLTS Quits Rate (Leading Demand)
The rate at which employees voluntarily leave jobs. High quits indicate worker confidence and a tight labour market; falling quits signal workers sense fewer opportunities. Often the earliest signal of a turn. Monthly, since 2000.

3. Average Weekly Hours (Leading-Coincident)
Employers adjust hours before headcount. A decline in average weekly hours for production and nonsupervisory workers is one of the earliest signs of weakening demand. Part of the Conference Board Leading Economic Index. Monthly, since 1964.

4. Initial Jobless Claims (Stress)
Weekly new filings for unemployment insurance. The most timely labour market indicator with only a one-week lag. Rising claims above the 4-week moving average signal increasing layoffs. Inverted in composite: lower claims = higher score. Weekly, since 1967.

5. Continuing Claims (Stress)
The total number of people receiving unemployment benefits. Rising continuing claims indicate laid-off workers are struggling to find new jobs, signaling a weakening labour market. Inverted: lower = better. Weekly, since 1967.

6. Nonfarm Payrolls (Coincident Employment)
The headline employment number. Total nonfarm employment change measures the net flow of hiring vs separations. The most-watched labour market indicator but is coincident, not leading. Monthly, since 1939.

7. Unemployment Rate (Lagging)
The percentage of the labour force that is unemployed and actively seeking work. Rises only after significant layoffs have occurred and is typically the last indicator to turn. Monthly, since 1948.

The Sahm Rule

Developed by economist Claudia Sahm, this recession indicator triggers when the 3-month moving average of the national unemployment rate rises by 0.50 percentage points or more relative to its low during the previous 12 months. Since 1970, every trigger has coincided with the economy already being in or entering a recession. The rule is designed for real-time identification of recession onset.

Composite Score & Sub-Scores

Each raw indicator is transformed into a Strength Indicator (0-100 oscillator) using: EMA(10) / SMA(25) ratio, min-max normalized over a 260-period rolling window, then smoothed with an Ehlers 2-pole Super Smoother filter for minimal-lag noise reduction.

The composite Labour Cycle Score combines three sub-scores:

• Leading Demand (40%): JOLTS Openings + JOLTS Quits + Average Weekly Hours
• Coincident Employment (30%): Nonfarm Payrolls + Employment-Population Ratio
• Stress (30%): Initial Claims (inv.) + Continuing Claims (inv.) + Unemployment Rate (inv.)

The composite is mapped to a -2 to +2 scale where +2 = robust expansion and -2 = severe contraction.

Cycle Phase Classification

• Expansion (Score >= +1): Strong hiring, falling claims, low unemployment
• Cooling (Score 0 to +1): Growth decelerating, leading indicators turning, but payrolls still positive
• Weakening (Score -1 to 0): JOLTS declining, hours falling, claims rising
• Stress (Score <= -1): Rising unemployment, Sahm Rule triggered, payrolls negative
• Recovery: Leading indicators turning up from stress (JOLTS rising, claims falling from peak)

Data Sources: FRED (Bureau of Labor Statistics, Department of Labor — Public Domain with citation). Key FRED series: JTSJOL (Job Openings), JTSQUR (Quits Rate), AWHNONAG (Weekly Hours), ICSA (Initial Claims), CCSA (Continuing Claims), PAYEMS (Payrolls), UNRATE (Unemployment Rate), SAHMREALTIME (Sahm Rule).