An Alternative Version of the KC Fed LMCI Suggests Little Change in the Labor Market in September

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Recent delays in the release of government data have led researchers to adapt or seek alternatives for official measures of the health of the labor market. For example, 13 of the 24 variables used to construct the Kansas City Fed’s Labor Market Conditions Indicators (LMCI) are from the Bureau of Labor Statistics’ Employment Situation Report, whose latest release has been delayed.^_ However, because the LMCI retains 11 up-to-date data series, a restricted version of the two headline indicators—level of activity and momentum—may still provide a useful picture of the labor market.^_

Chart 1 shows that the official level of activity indicator (blue line) and our restricted level of activity indicator (purple line) move together, providing similar views of the labor market. Prior to the pandemic, they show a very strong correlation at 0.99. Although the relationship between the two deviates slightly from 2020 to 2021, their strong co-movement resumes thereafter. Looking at the past couple of months, both indicators have been declining at similar rates, with both series approaching their historical averages.

Chart 1: Our restricted level of activity indicator behaves much like the official level of activity indicator

Chart 2 shows that much like with the level of activity, the momentum indicator constructed with only 11 input series behaves much like its unrestricted counterpart. Indeed, the pre-pandemic correlation between the two measures is 0.95. Because the restricted momentum indicator (purple line) excludes payroll growth and the unemployment rate, it exhibits smaller swings than the baseline momentum indicator during the pandemic. However, with fewer other input series, it responds more strongly to the sharp increase in announced layoffs in March of this year. Overall, both measures have been retracing their dips from earlier in the year but remain below zero.

Chart 2: Our restricted momentum indicator behaves much like the official momentum indicator

Since our restricted LMCI series closely match the official LMCI series, we use the restricted series to evaluate the health of the labor market in September 2025. In September, our restricted level of activity declined from 0.06 to zero, which represents the indicator’s historical average. Although the zero reading suggests that activity is no longer above its historical average, the pace of decline in the index is in line with recent month-to-month declines in both the official and restricted level of activity indicators. In September, our restricted momentum indicator increased by 0.18, from −0.88 to −0.70. This change is also in line with recent month-to-month changes in both the official and restricted momentum indicators. Additionally, because the indicators are constructed such that their historical average is zero and their standard deviation is one, this reading suggests that momentum in the labor market, though below its historical average, is well within the range of typical deviations from this average. Overall, these readings suggest that the labor market is continuing to cool at the slow but steady rate we have seen over the last two years, and activity remains near historical levels.

While the LMCI provide a useful gauge of the labor market’s health in September, we can also use them to provide real-time economic forecasts of key labor market variables such as the unemployment rate and payrolls. The left panel of Chart 3, which builds on Glover, Mustre-del-Río, and Pollard (2021), shows that in a simple forecasting model of the unemployment rate, the restricted LMCI provides a useful estimate of the current unemployment rate.^_ As can be seen from the panel, the forecast tracks the official unemployment rate well for the past few years. Currently, the forecast based on the restricted LMCI implies an unemployment rate for September 2025 of 4.4 percent, only a slight increase from August’s official unemployment rate of 4.3 percent.

Chart 3: The restricted LMCI suggests that the unemployment rate rose slightly in September and employment growth increased slightly

The right panel of Chart 3, which builds on Lusompa and Mustre-del-Río (2025), shows that the restricted LMCI can also provide a useful real-time forecast of payroll growth.^_ Outside of the predicted drop in payrolls earlier this year (related to the aforementioned spike in announced layoffs), the forecast using the restricted LMCI tracks official payroll growth well. Currently, the forecast implies that the economy added an average of 60,000 jobs a month from July to September, a slight acceleration from the official three-month average of 29,000 from June to August, but within the range of other alternative payroll estimates.^_

In summary, when official data sources are delayed or unavailable, the LMCI can still provide a timely measure of the labor market’s health. Additionally, this data-restricted LMCI can be used to forecast key labor market measures such as the unemployment rate or payroll growth. Accordingly, we calculate the LMCI for September and find that the restricted version suggests little change in the labor market from August to September. While official statistics remain vital data sources for researchers, the LMCI’s long history and wide variety of inputs may make it a useful alternative for policymakers facing data delays.

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