Research Team at ING, suggests that despite being a lagging indicator of economic health, last month’s increase in labour market slack is not encouraging. Key Quotes “Today’s NFIB survey will provide the most up to date snapshot of business confidence before next week’s FOMC meeting. The Fed’s labour market conditions index, which extracts the underlying trend from 19 employment/productivity measures, unexpectedly fell both in January and February. This indicates that the overall labour market has become weaker (more slack) and is the largest out of only 5 monthly declines since 2009. Until we see a few more readings, we would tentatively suggest that this phenomenon is at least partially statistical rather than economic (the index is not a simple weighted average). After all, Friday’s labour report (upon which this is heavily based) contained good as well as bad. The main point though is that the decline was fairly small in the context of the overall level of the index, which continues to show that the economy is very close to “full employment”. Regardless, it is important to note that labour data is typically a lagging indicator of economic health as it often takes firms a few months to devise and subsequently implement hiring plans following a pick-up or fall in activity. Thus, when trying to decide if the US is headed for recession, sentiment indicators are generally of greater interest. Here, the small firm NFIB Business survey will be particularly relevant both today and over the coming months. Although this tends to receive less attention than the ISM surveys and increasingly, the Markit PMIs, small firms account for a large proportion of employment growth and crucially, are typically more domestically focussed (ie, less affected by Chinese growth). Thus, we think this might be a better place to look for signs of a recession than the more widely monitored ISM indices. That said, having trended downwards in 2015, it will be interesting to see whether the NFIB survey follows the manufacturing ISM’s most recent bounce. Looking beyond today, there are only a few US data releases which are likely to materially affect the Fed outlook before their meeting next Wednesday (the exceptions being retail sales and CPI next week). Although we do not expect a move, it seems fairly inevitable that the dot diagram will be adjusted to reflect a slower pace of hikes this year. We do not expect a hike before the third quarter (if not later), a view which is increasingly being adopted by the market (which are pricing a 60% chance of a September hike).” For more information, read our latest forex news.