Jobless claims are still pointing to US expansion

The latest report on weekly claims for unemployment insurance was released today showing 221,000 new claims. That takes the 4-week average to 222,250, which compares favourably to the year ago figure of 241,250. Some comments below

I have been tracking this data series as a macro indicator for directionality of growth for almost two decades now. And what I have found is that intial jobles claims do a very good job in warning of a slowdown.

What we are looking for is a meaningful uptick in the year-over-year change in initial jobless claims because this presages economic slowing and recession. Here’s the chart below.

1-year change in 4-week average inital claims

In the past, what I have concentrated on is the level of the change as a predictor of recession. For example, when I started writing at Credit Writedowns in early 2008, I saw that the uptick of jobless claims had crossed my threshold of 50,000. And I said that was a clear sign of recession. At the time, I also used a continuing claims level increase indicator of 250,000 as an indicator. And I was looking at a rise over a six month time frame.

What I am looking at now is the direction of change, using year-on-year numbers to eliminate residual seasonality. And what this does is two things beyond eliminating seasonality. First, the one-year timeframe makes the change in claim eligibility a moot point. Unemployment insurance claim eligibility simply doesn’t change rapidly enough to have a meaningful impact on year-over-year numbers.

Second, the directionality piece captures economic slowdowns and not just recessions. When recession does come, the +50,000 indicator is usually flashing, but just. Basically, recession is right on top of us by the time we get to a 50,000 uptrick in weekly initial claims. But the change in the number of claims stops falling long before then. And while this directionality change gives plenty of recession false positives, it does a very good job of showing up economic slowdowns.

Every increase in initial jobless claims is a loss of income and spending power. And every increase in initial jobless claims represents a host of people whose family and friends see a family struggling with real financial stress. That adds up and causes the economy to slow.

Right now, initial claims are not sending a signal of slowing.

Recent year-over-year changes in jobless claims

Relative to last year, the initial claims numbers are still falling at a rate consistent with expansion. When we begin to see these numbers tick up durably, say over a 2 or three month period, that would be a signal of weakness. We’re not there yet.

For me, the claims data series is sending a modestly bond bearish signal. That should push against the recent curve flattening we have seen of late. But clearly the jobs report tomorrow is much more important a signal for markets.

My expectation is that as the Fed continues to hike, and as this expansion continues to inch toward its end, the initial claims series will crack. And it will do so before a recession occurs, offering a signal of impending slowing and a real economy analogue to curve flattening.

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