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Last week’s widely watched employment situation (“nonfarm payrolls”) report showed a rise in the unemployment rate.

This was at least partly due to more people entering the labor force and seeking work—a good thing. Nevertheless, unemployment has risen steadily over the past year, and now stands at 4.1%. And while that’s actually very low in historical context, it’s meaningfully higher than it was on the eve of the pandemic (3.5%).

Sahm things never change

Historically, when the 3 month average of the unemployment rate rises by 0.5% above the 1 year low, a recession has always followed. There are few such clean and accurate predictors in economics, and so this phenomenon—codified as “the Sahm rule” (named after its inventor, Claudia Sahm)—is closely tracked.

Yesterday’s report showed unemployment at 0.4% above the low—a hair away from triggering the Sahm rule. The question is whether the recent slowing in employment growth is a return to the trend, or the beginning of a slowdown that pushes us right through and below the trend, into recession.

Employment by industry

The tricky thing about trying to establish whether this is normal is that nothing about the economy has been normal since the beginning of 2020. Look at the leisure and hospitality sector, for example (top right corner of the chart below).

Under normal circumstances, you’d look at the precipitous drop in job growth in that sector and think something very bad is happening. But in fact, the slowdown only seems so steep because it comes after ravenous hiring as the economy reopened in late 2021.

On the other hand, almost fully half of job growth is now coming from one sector—the education and healthcare industry. When so much growth is coming from an acyclical sector, that says something about how the cyclical ones are doing.

The construction industry has held up well

What’s maybe most surprising is that construction—supposedly highly sensitive to interest rates—hasn’t slowed much at all. This is true for both residential and nonresidential parts of the industry. In fact, employment in residential building construction has actually accelerated recently.

The construction industry is 0.5% larger than it was 3 months ago—a larger increase than most.

Other data points corroborate the story of construction resilience. The JOLTS report last week showed that construction job openings have fallen, but merely in line with the rest of the economy. In fact, just a few months ago the openings rate in construction was as high as the overall economy on average, which is very unusual (usually the job openings rate for construction is relatively low) and indicates extreme demand for construction workers.

My sense is that the ability for the construction industry to defy gravity is a function of the amount of pandemic-delayed construction that is still taking place. Even while starts have fallen, construction of buildings started in prior quarters is ongoing, and this is fueling demand for construction workers.

How long can this last? We are now in speculation territory. But historically, this is how real estate slowdowns have developed: home starts decline, followed (with substantial lags) by slowing construction, and finally by rising unemployment in the construction industry.

With starts having peaked fully two years ago, and construction activity now clearly declining rapidly, I wouldn’t be surprised to see construction employment soon—finally—begin to soften.