Jobless claims still not pointing to imminent double dip recession
I tend to put a lot of stock in jobless claims as a coincident (real-time) indicator of the economic scene. My reasoning here is fairly simple. Household spending makes up 70% of the economy. Households are dependent on labour wages for the lion’s share of their disposable income. Absent changes in debt levels, one should expect changes in output (which is what the GDP measure we care about is) to mirror changes in consumer spending derived largely from labour income.
So, naturally, if fewer people are losing their jobs and filing for unemployment compensation, labour income is likely to increase. If more people are filing jobless claims, disposable income is likely to move lower. The key here is that we are looking at a first derivative statistic i.e the change in GDP as determined largely by the change in disposable income.
Now, there are a number of caveats to this:
- The government can boost disposable income via tax cuts or diminish it via tax increases.
- Households can lever up and boost their spending or they can delever.
- When interest rates are rising, interest income is too. When rates are falling, so is interest income.
My rule of thumb has been that an increase of more than 50,000 in initial jobless claims presages recession. A decrease in jobless claims presages recovery. (I use year-on-year or six-month changes in the 4-week average data.) The data supporting this rule of thumb are fairly good in the 43 years since the Department of Labor in the US started reporting weekly claims. I first pointed this out in 2008, saying that jobless claims had been a perfect recession indicator i.e. no false positives and never a miss. See Another Perfect Recession Indicator for more on this.
Last year, I also relied on jobless claims as one indicator telling me the economy was nearing recovery. See Revisiting employment indicators for signs of recovery from last August which is about the time I believe the technical recovery began.
So where are we now?
The chart above says we are not near a double dip recession. I happen to think there is a 50-60% we will suffer a double dip in 2011. Nevertheless, the data here are saying any recession will not be caused because of lost jobs. For comparable periods, look at the numbers around 1977, 1985 and 1996. (Note: the shaded regions represent recessions. See What is a double dip recession? for Bob Shiller’s alternative definition of one).
I am not looking at this data point in isolation. Other data point to problems, consumer spending first among them. If we do suffer a recession now, it will be because of deleveraging by consumers. Consumer credit is still contracting now, even though GDP has turned higher. Although this is positive as consumers are over-leveraged, it is also an example of the paradox of thrift that is going to be a drag on the economy.
Nevertheless, the trend in the year-on-year change in jobless claims is not good. Unless we create more jobs, the combination of stagnant before-tax income and deleveraging (and maybe even tax increases) will likely mean double dip in 2011 in my opinion. At a minimum, the economy will be operating well below potential.
Clearly, we all hope this can be avoided but policy decisions determining if it will have already been made. Policy now in the pipeline will be too late to have an appreciable effect.
Speaking of Jobs; economic Historian Edward Luttwak was on ABC Lateline Business on Aug 7 2010. He strongly recommended Australia (and the rest of the world) wake-up and protect itself from China’s obvious rejection of free-trade and open-markets via use of subsidies to protect and develop industries and diversify its own economy at other economy’s expense.
He warns that unless Australia realizes this and rejects the failed free-market theory, come religion, it will lead to a disastrous hollowing out of economic life-blood. He also thinks more is at stake than just economics (but didn’t get specific) if Australia and other parts of the world don’t respond in kind to this aggressive trading behaviour soon.
He asserts China now has the potential to keep doing this to most of the rest of the world.
As he sees it, China tries to get its people jobs via 1) firstly competing fairly via working hard, then if that does not work sufficiently it, 2) lowers the currency, and if that doesn’t get the result it wants and development competitive edge, they, 3) subsidize to demolish foreign competitors, and steal market share, to get the J O B S.
Ultimately it’s all about getting the jobs jobs, and for those being job-stripped, it’s about having a skilled national capacity to compete. Or else Australia etal will regress into what he calls the ‘colonial economy’ mode.
Clearly a trade battle is brewing and it will be a case of hang-together or hang-separately.
Correction: Luttwak was on ABC Lateline Business on > SEPT < 7 2010 – not August
You lost me Edward. Can you elaborate a bit?
> My rule of thumb has been that an increase of more than 50,000 in initial jobless claims presages recession.
Let’s accept that rule of thumb is true [I have no idea if it is or not]. The US jobless claims have been bouncing around the 420k to 490k mark more or less over the past year. Any number above 400,000 is considered to be an economy “losing jobs.” Indeed, we’re still losing more jobs now than during the peak of the two previous recessions if my memory serves correctly (graph somewhere about this on Calculated Risk).
If the economy continues to shed 420K to 490K jobs a month, won’t this steady “drip-drip-drip” loss of jobs accomplish the same thing – aka, a recession [or at least something that feels like one if not “technically” a recession] – as a big spike down of 600K or more lost jobs? The “drip-drip-drip” loss of jobs scenario will take longer, but the effect will be the same. Won’t it?
Jim, I think where I lost you is this statement:
“The key here is that we are looking at a first derivative statistic i.e the change in GDP as determined largely by the change in disposable income.”
What I meant by that is that we care about the change in GDP’s level. And as such we are looking for measures that connect to that change. Just because there are 450,000 jobless claims per week, which causes non-farm payrolls to decline doesn’t mean GDP won’t go up. A steady drip drip drip does NOT accomplish the same. I may write another post as to why since I was thinking about this before I wrote the post.
If you look at the data you would see what I mean. Other factors like leverage, average hourly wages, the savings rate, etc factor in.
What may be different about this cycle is the deleveraging. In the absence of income growth and increased leverage, a mid-cycle bout of weakness like we saw in 1977, 1985 and 1996 would turn into the self-reinforcing bust of recession because policy makers and consumers are out of ammo.
And, yes, the rule of thumb works. It has been a consistent gauge for both every recession and recovery since 1967.