Charts of the day: Jobless claims as a real-time economic indicator
Jobless claims: a good coincident indicator of the US economy. If you look at changes in jobless claims it can also help you call turning points in the economy. I have done claims graphs a few times over the past six years but I haven’t posted an update in a while. So I wanted to update you on what the data are saying.
The most recent entry in my jobless-claims-as-economic-indicator posts was in October of last year when claims were hitting levels in the low 300,000s. What I wrote then was that a) “the actual level of jobless claims on a seasonally adjusted basis is largely consistent with a cyclical peak in the economy” and b) “While jobless claims can fall further still, I believe they are unlikely to fall much further”. Both of those predictions have held up (so far) as Q3 2013’s growth was the peak rate of growth for this cycle. And claims have not dipped much below the October levels on a sustained basis.
The reasons the jobless claims data are useful is because it is a weekly real-time indicator directly related to jobs, personal income and wages. What is important in terms of the business cycle is not the absolute level of claims but the change in that level. If jobless claims are falling, this means fewer people are out of work, earning less income that can be used toward consumption which adds to GDP. On the other hand, if more people lose their jobs, it suggests that the labor market is weakening and that fewer people have enough disposable income to keep GDP rising.
In the past, I have used a +50,000 year-over-year increase in jobless claims as a demarcation for recession. When 50,000 more people are claiming unemployment benefits per week than a year ago on a sustained basis, that is enough of an impact to start the cyclical train of declining income growth, declining retail sales growth, and declining inventory accumulation rolling to where income, retail sales and inventories start to actually decline. That’s when you get recession.
Here’s what all recessions look like in terms of jobless claims since 1967, when data first began. I am using the year-over-change in the seasonally adjusted 4-week moving average of initial claims as the data series. The grey shading indicates periods of recession.
What you should notice is that when a recession begins, year-over-year jobless claims comparisons generally go positive right when or even before the recession hits.
What are the anomalies here? The 1980-1982 double dip recession saw year-over-year jobless claims comparisons plummet for a year from mid-1980 to mid-1981. And the number was still deeply negative when the second recession officially began in 1981. The crushing Volcker interest rate hikes have a lot to do with the double dip there.
Then there’s the 1990-91 recession. The claims numbers were sending a near-recession signal for all of 1989. And year-over-year comparisons had actually dropped slightly when the official recession began in 1990.
Even with those anomalies, it is clear that initial jobless claims tell us something about the direction of the economy. And if you look at the chart for 2009-2014, what you see is a massive plunge in year-over-year comparisons followed by a static decrease for the past year. Where we are today is slightly better than where we were last year at this time. And that is not remotely consistent with recession. What we would need to see for a recession is the blue line rising above 0 and staying there for at least one or two months. When that happens, year-over-year claims comparisons are unfavourable enough to push down retail sales and begin an inventory purge – at which point layoffs start to happen en masse, income and spending drop further and recession takes hold.
The US economy is not in a recession and does not look poised for recession from what I am seeing. However, year-over-year comparisons will become more difficult because we were near what I think are cyclical lows in summer and fall of 2013. Once we hit the summer, there is a very real chance that we will start seeing negative year-over-year comparisons in initial jobless claims. And then we will have to see what the other data on retail sales, production and so on are telling us. I say the US economy continues to grow, but not at anything above a 2-3% pace.