US jobless claims look grim
U.S. Jobless claims came out again today as they do every Thursday at 8.30AM. The numbers were not good, and give a clear indication of why the Fed will not cut rates in the face of 5.6% inflation. Initial claims came in at 450,000, moving the 4-week average up to 440,500. Continuing jobless claims also rose, coming in at 3,417,000. All numbers are seasonally adjusted. While the data may be skewed by the 3-month jobless claims extension, it is evident that the labor market in the U.S. remains weak.
This week, I want to focus in on the change in jobless claims. My thesis here is simple: it is not the actual level of unemployment or unemployment claims that is important, it is the change in that level. The unemployment rate or unemployment claims level only demonstrates whether the economy is working at or near full capacity, lower numbers being better. However, the change in those numbers over a given time period shows how much the labor market is growing or contracting and this is what drives peoples spending habits — not the levels. Consumers respond to perceived changes in the labor market.
When looking at change, I use the 4-week average numbers and make year-on-year comparisons to avoid seasonality problems. Doing this, I discovered that every recession in the U.S. since jobless claims data has been available has involved a rise of +50,000 in the number of people filing for unemployment and a rise of +200,000 in continuing jobless claims (see my post Another Perfect Recession Indicator). There are no false positives by the way — this is a perfect recession indicator.
So, if one looks at the data from 2008, one can clearly see that jobless claims and continuing claims comparisons are getting worse, which is a clear indication of a deteriorating labor market — one major sign of recession. However, if one compares data from even the shallow labor market downturn of 2000-2002, it is evident we have a long way to go before the labor market turns back up.
The long and short of it is that the labor market in the U.S. is soft and weakening. And we are nowhere near the bottom of the labor market’s downturn, judging from past cycles. This implies that the U.S. economy is in a recession and that the Fed, knowing this and also concerned about systemic risk in the bank sector, will not be cutting rates despite high inflation (see my post U.S. inflation at 17 year high).
Whether this confluence of events will lead to stagflation remains to be seen. I am betting on a reduction in inflation in the U.S. and globally. The Fed is praying for the same.