Danielle DiMartino Booth, Quill Intelligence, Nonfarm Payroll signals


  • Nonfarm payroll employment (NFP) is the residual between labor flows that perpetually rotate in and out of the private and public sectors; the JOLTS data, released with a lag, proxies NFP’s initial print by laying bare the difference between nonfarm hires and nonfarm separations
  • The JOLTS hires-separations spread dictates NFP; it hit 362,000 in December, a four-year high that corroborates that month’s initial print and suggests January’s spread will be in the vicinity of last month’s initial NFP print of 304,000
  • JOLTS nonfarm hires provide an early indication for the first NFP negative-print of a cycle as expansion turns into contraction; that said, it’s the JOLTS quits-layoff spread that signals a turn in the labor market with the longest lead time
  • The JOLTS quits-layoff spread separates quitters, who leave their jobs voluntarily, from layoffs, which are by definition involuntary; the current cycle echoes the last as nonfarm hires peaked in October 2018, three months after the quits-layoff spread peaked last July
  • The market is nowhere near prepared for a negative NFP print, especially in the wake of December and January’s back-to-back initial prints north of 300,000; if the cycle gleaned from JOLTS holds, the first negative print will indeed occur this calendar year


Warning: The following Feather may contain elements that are not suitable for bullishly biased audiences. Viewer discretion is advised.

Doomsday Preppers’ three-year run on the National Geographic (Nat Geo) Channel was undoubtedly ahead of its time. We’re still here, aren’t we? The American reality TV series profiled various survivalists, or “preppers,” who were stockpiling to survive various Armageddon-esque events that catalyzed the end of civilization, like economic collapse, societal collapse or perhaps, an electromagnetic pulse. Nat Geo’s description of the show explained that “the end of the world didn’t come for Judgement Day followers who expected the Rapture on May 21, 2011. But who are these people who continuously dread the end of the world and obsessively prepare themselves and their loved ones for the worst?”

No, Nat Geo wasn’t channeling Jerry Seinfeld. That said, these people sound creepily similar to financial asset holders, some of whom obsessively groom their portfolios with strategically-conceived hedges, just in case of emergency. Is there really a difference between building a bunker and gorging on gold?

Doomsday scenarios for investors usually are rated ‘R’…for Recession. Fundamental macroeconomic indicators regularly used to ascertain recession probabilities include GDP, industrial production and nonfarm payroll employment (NFP). Just for fun, let’s focus on the third one, and doomsday prep for a decline in NFP.

NFP is a residual. There…we said it! This residual occupies the space between labor flows that are perpetually rotating in and out of the revolving doors of private and public America. The JOLTS (Job Openings and Labor Turnover Survey) report illustrates the payroll residual every month it is released with a lag. It’s simple labor accounting – labor in, labor out. In the case of JOLTS, it’s the difference between nonfarm hires and nonfarm separations. This number hit 362,000 in December, a four-year high and the fourth strongest month for the current business cycle. Remember the initial print for December NFP? 312,000. Given the simplicity of the math, expect next month’s hires-separations spread to be somewhere in the vicinity of January’s NFP of 304,000.

Now that you’ve been brought up to speed on the backstory of the NFP residual, the next thing you want to establish is what components of the hires-separations spread are the most valuable forward guidance prisms into NFP turning points. There are two such elements, but they can only be observed over the 2000s expansion given the limited JOLTS history.

The most visible of the two is nonfarm hires (blue line above). Hiring is a reliable leader of payroll employment and has provided early indications for first-print declines in NFP, especially those in close proximity to the onset of recession. Illustrated above, the November 2006 peak was touched nine months prior to the first-print decline of -4,000 in August 2007.

But it’s the quits-layoffs spread (red line above) that flagged the labor market turn even earlier. Nonfarm separations can be disassembled into three parts – quits, layoffs and all other separations. The quits-layoffs spread is effectively the difference between good unemployment and bad unemployment. Quits leave voluntarily for greener pastures;  layoffs are booted involuntarily to file for unemployment insurance. NFP strength is seen when quits grow their lead over layoffs. Conversely, weakness is revealed when layoffs rise and cut into the quits’ money grab. In the last cycle, the quits-layoffs spread peaked in August 2006, three months ahead of nonfarm hires and 12 months before the August 2007 initial negative print.

Intriguingly, the current cycle is setting up the same way. Nonfarm hires peaked in October 2018, three months after the quits-layoffs spread peaked in July 2018. Obviously, the first-print decline hasn’t been dropped onto investors yet. But we would argue this shell will pass through the bomb-bay doors in the current calendar year.

Are financial markets prepped for a decline in payroll employment? Clearly that’s not the case with NFP posting back-to-back initial prints in December and January north of 300,000 for the first time in 19 years.

Rewind to September 7, 2007. The market’s performance the day the August 2007 jobs report hit the wires conveyed the magnitude of the shock with the S&P 500 closing down 1.7%, the Dow losing 1.9%, 2-year Treasury yields falling 18 basis points (bps) and the 10-year Treasury yield by 13 bps – a bull steepening of the curve. The risk-off tone generated safe haven flows into the yen (up 1.5%) and gold (up 0.7%).

The thing is, cycle tops in the two JOLTS metrics of nonfarm hires and the quits-layoffs spread were well entrenched by then. Their signals had already raised the probability for a negative NFP surprise. It’s time to put these labor indicators on your business-cycle doomsday preppers’ list of must haves right next to water, food, fire, light and ammo.