A layoff feels like lightning: sudden, personal, unfair. But almost no layoff is actually sudden. Months before the letter arrives, the overtime dries up. The Saturday shifts stop being offered. The...
A layoff feels like lightning: sudden, personal, unfair. But almost no layoff is actually sudden. Months before the letter arrives, the overtime dries up. The Saturday shifts stop being offered. The new contract that would have needed two more hires quietly does not materialize. The help-wanted sign comes out of the window of the shop down the road, and then out of the windows of three more. The job market, it turns out, is one of the most courteous parts of the economy: it warns before it wounds. The tragedy is that most households only learn to read the warnings in hindsight, narrating them at the kitchen table after the letter has come. This essay is about reading them beforehand, while there is still time to act.
Our guide is chapter 5 of The WSJ Guide to the 50 Economic Indicators That Really Matter, by Simon Constable and Robert E. Wright (Harper Business, 2011), the book this wave of essays is working through. The chapter carries an unlovely title, "Underemployment or Slack," and it opens with a jab at political sloganeering: Bill Clinton's famous campaign line should not have been "It's the economy, stupid," the authors say, but "It's the jobs, stupid," because for ordinary people a weak economy simply is a lack of jobs. Then they make the observation the whole chapter turns on: the unemployment rate everyone quotes is "just too blunt a measure." The signal lives one layer down.
Here is the mechanism, and once you see it you will never unsee it in your own workplace. When business slows, managers do not fire people first. Firing is expensive and, more importantly, hard to reverse. The book quotes Marc Pado, a market strategist at Cantor Fitzgerald: "You're going to try to preserve your workforce because you've trained them and there is a cost to training them." A manager who fires trained workers at the first soft month, then has to rehire and retrain strangers when the lull turns out to be a blip, has paid twice for the same staff. So managers do the cheaper, reversible thing instead: they cut hours. Shifts shrink. Part-time spreads.
That is why, as the authors put it, "the number of employees working fewer hours than make up a normal workweek rises before actual layoffs begin." The people working part-time who want full-time work, plus those whose employers have trimmed their hours, are collectively called slack, and the US Bureau of Labor Statistics counts them every month, separately from the headline unemployed. Slack rises first. Layoffs follow later, "typically only when business has slumped off for an extended period." The queue at the labor office is the last chapter of a story whose first chapter was written on the shift roster months earlier.
The book is careful about the signal's limits, and the care is part of the lesson. The warning works going into a downturn but is unreliable coming out of one: some employers rehire through part-time work, but many wait until they are certain, so in recoveries the authors redirect your attention to a different line on the same report: overtime. "If overtime work is strong for several months, employers will likely start hiring new workers because they will be cheaper than paying time and a half to increasingly worn-out workers." Hours lead jobs in both directions. Shrinking hours foretell firing; swelling overtime foretells hiring. And the book adds a warning against fake-outs: temporary blips, like the US Census Bureau hiring scads of temps every ten years and releasing them soon after, can imitate a real turn, which is why this dial, like every dial in the book, should be read alongside others before you believe it.
The second gauge for this essay comes from the book's chapter 3, on consumer sentiment, and it measures something softer: how people feel. Two American institutions, the Conference Board and the University of Michigan, simply poll households on how they feel about the economy now and in the near future, because, as the authors write, "when consumers feel better they spend more." Sentiment matters to a household for a blunt reason: your job is someone else's spending. When millions of families quietly decide to postpone the sofa and the holiday, the slowdown they are worried about becomes the slowdown that arrives, and it arrives first as reduced hours at businesses that sell postponable things.
But the sentiment chapter's real gift is a discipline for reading any emotional gauge, including your own neighborhood's mood. These indices, the book warns, are "very volatile," jolted by petrol prices and bad headlines, and the authors' chart shows sentiment falling dramatically going into recessions but jittering meaninglessly in between. So the book quotes the market analyst Art Hogan's rule: "What we really try to do is look at the trend, not a single point in time." Blend the noise out, he advises, with a three-month average. The authors compress it into a line worth pinning above the family notice board: "one sunny data point does not signal an economic summer."
There is a sobering historical note attached. During the recessions of 1981 to 1982, 1990, and 2008 to 2009, the book records, consumer confidence rose and fell back "once, twice, even three times before those recessions ended." False dawns are normal. A household that celebrates the first good month, and spends accordingly, gets caught by the second dip. Trend, not moment. Three months, not one.
Now the honesty the book requires, and the translation our readers need. This is a 2011 book about American data. The BLS tables it names have been reorganized since; the broad underemployment measure Americans now call U-6 is the modern descendant of the slack the authors describe; even in 2011 the book warned that the BLS had just changed some statistics and that an unaware reader "might mistake a change in the numbers for a real change in economic conditions." And most of our readers do not work in economies where a government agency counts involuntary part-timers every month at all. In much of Africa, and in the informal economy everywhere, nobody is counting your slack. The book stops here. We go one step further.
The principle does not need the agency. Hours lead jobs everywhere, because managers everywhere face the same arithmetic about training costs, and the informal economy has hours too; they are just denominated differently. The boda rider (motorcycle taxi driver, for readers outside East Africa) counts trips per day. The tailor counts orders in the book. The market seller counts how early the stock runs out, or fails to. The salaried worker counts overtime offered, contracts renewed, vacancies posted and then quietly withdrawn. Every one of these is a labor statistic, published daily, one household at a time, and each household is uniquely positioned to collect its own.
So collect them. Pick the two or three numbers that measure demand for your family's work: hours or shifts offered this month, orders or trips or billable days, and one number for your employer's health that you can observe honestly, such as whether they are hiring or freezing. Write them down monthly. Then apply Hogan's rule and the three-month average, because a household's own data is exactly as noisy as Michigan's: one slow month is weather; three shrinking months is a season turning. What you have built, for free, is a leading indicator of your own income, and it will speak months before any letter does.
Suppose the numbers turn. Your hours log shows three months of shrinkage; the help-wanted signs on your street are coming down; the mood among customers has soured and stayed sour past the three-month test. The signal has passed trend and persistence. What does a household actually do with the months of notice the job market has courteously given?
The book answers for investors: as unemployment approaches, rotate to the defensive. Pado's list in the chapter is "drugs, food, and alcohol: the mainstays of human nature," companies whose earnings hold because people keep buying necessities in hard times. And he adds a line that translates perfectly to households: defensive investing is not about winning but about losing less. "It's a matter of what goes down less," he says. A family's defensive rotation has four moves, in order of urgency.
Cash before comfort. The months when hours are shrinking but pay is still arriving are the last cheap months to build the buffer. Every discretionary purchase deferred now buys weeks of calm later. This is exactly when the household budget should quietly shift toward its own consumer staples and away from its own discretionary spending, the family-scale version of Pado's rotation.
Income before pride. The warning window is when a second income is easiest to start, because you are not yet desperate. The newlywed couple with one fragile income and one stable one should treat the stable one as the household's bond and protect it, while using the window to add a small stream, weekend work, a side trade, a skill certified, that could be scaled if the fragile income fails. Founders should read their own payroll the way this essay reads the economy: if you are cutting your workers' hours, believe what that says about your next two quarters, and adjust your family draw before events adjust it for you.
Skills before severance. Training is cheapest while you are still employed. The worker who senses the turn and spends the window earning the license, the certificate, the second trade, walks into any layoff with an exit already half-built. The worker who spends the window hoping walks in with a CV last updated in a boom.
Truth before comfort, at the table. The hardest move is the conversation: telling the family, early, that the numbers have turned, so that the household adjusts together rather than discovering everything on the day the letter comes. Shame delays this conversation in almost every culture; ours are no exception, and the delay is purchased at the worst possible price, months of unadjusted spending. A family that has normalized reading its own labor statistics out loud, in trend, without drama, has removed the shame from the subject before the subject ever gets sharp.
And when the cycle turns the other way, run the same instrument in reverse. The book's recovery signal, remember, is overtime: sustained extra hours precede hiring. In your own log, three months of swelling demand is the honest green light for the expansions the family postponed, and a household that waited out the false dawns with Hogan's three-month rule will expand into a real recovery rather than a mirage.
This is native work for your Cash Log in LegacyPot. The Cash Log already records what comes in and goes out; add the leading line beside it, hours, orders, trips, shifts, whatever measures demand for your family's work, and review the three-month trend at the same sitting where you review the month's cash. Income tells you what already happened. The hours line tells you what is about to.
The job market will warn your family. It warns almost everyone, months ahead, in a language of rosters and order books and signs in windows. The only question is whether anyone in the house is keeping the log that turns those warnings into time, and time into the quiet moves, cash, skills, a second stream, an honest conversation, that make the eventual lightning strike a manageable storm. Watch the hours. The hours know first.