Thursday, July 16, 2009

Mid-Cycle Meltdown!: Jobless Claims July 16 2009

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims declined significantly dropping 47,000 to 522,000 from last week’s upwardly revised 569,000 claims while “continued” claims collapsed dropping 642,000 resulting in an “insured” unemployment rate of 4.7%.

Well, the mid-July non-seasonally adjusted (NSA) spike is here and what wonders it has worked on the headline numbers.

Clearly, I misjudged the dynamic.

So, NSA initial claims jumped to their highest level since February and the NSA continued claims climbed to a near peak level comparable to values seen just a couple weeks ago BUT the seasonal adjustment is teasing out a peaking trend.

These series were exceptionally good at forecasting the recession and during all the Bullish brouhaha and nonsense of late 2007 and early 2008, I relied on them to disclose the reality of the trend in the job market and wider economy.

With today’s results it’s becoming more obvious that the massive initial inflation phase to unemployment has likely peaked out.

Now, looking at past cycles (especially the last two recessions), this does not imply that the pain is over in the job markets… we are still seeing a level of literal initial weekly jobless claims (non-adjusted series) well over 550K.

If history is to be at least a rudimentary guide, first time and continued unemployment claims will likely remain unusually high for at least another year or two (… as they had in the aftermath of both the early 90s bust and the dot-com bust).

Given the fragile state of the economy and the substantial financial stress being felt by so many millions of households, there are serious headwinds to any sustained recovery.

Further, the continuing claims series continues to present the clearest picture of what is likely to be one of the most problematic aspects of this period of economic crisis namely how to make an immense and growing number of highly specialized (college educated) service/professional service workers productive again.

It’s obvious now that we have reached the first real test of our majority services-based economy.

Unlike the “tech-wreck” of 2000-2002, our current downturn is very broad, leaving no sector and virtually no corner of the country untouched.

With millions of college educated workers now on the market incomes will clearly suffer but moreover, it will be soon all too clear that our prior bubble economy significantly overproduced service workers (particularly professional service workers) for which current employment opportunities will be scant resulting in continued and fundamental vicious-cycle effects.


The following chart shows the recent trend in initial non-seasonally adjusted initial jobless claims with the year-over-year percent change acting as a rough equivalent of a seasonally adjustment.

Historically, unemployment claims both “initial” and “continued” (ongoing claims) are a good leading indicator of the unemployment rate and inevitably the overall state of the economy.

I have added a chart to the lineup which shows “population adjusted” continued claims (ratio of unemployment claims to the non-institutional population) and the unemployment rate since 1967.

Adjusting for the general increase in population tames the continued claims spike down a bit.

The following chart (click for larger version) shows “initial” and “continued” claims, averaged monthly, overlaid with U.S. recessions since 1967 and from 2000.

As you can see, acceleration to claims generally precedes recessions.

Also, acceleration and deceleration of unemployment claims has generally preceded comparable movements to the unemployment rate by 3 – 8 months (click for larger version).

In the above charts you can see, especially for the last three post-recession periods, that there has generally been a steep decline in unemployment claims and the unemployment rate followed by a “flattening” period of employment and subsequently followed by even further declines to unemployment as growth accelerated.

This flattening period demarks the “mid-cycle slowdown” where for various reasons growth has generally slowed but then resumed with even stronger growth.

Until late 2007, one could make the case (as Fed chief Ben Bernanke surly did) that we were again experiencing simply a mid-cycle slowdown but now those hopes are long gone.

Adding a little more data shows that in the early 2000s we experienced a period of economic growth unlike the past several post-recession periods.

Look at the following chart (click for larger version) showing “initial” and “continued” unemployment claims, the ratio of non-farm payrolls to non-institutional population and single family building permits since 1967.

The most notable feature of the post-“dot com” recession era that is, unlike other recent post-recession eras, job growth had been very weak, not succeeding to reach trend growth as had minimally accomplished in the past.

Another feature is that housing was apparently buffeted by the response to the last recession, preventing it from fully correcting thus postponing the full and far more severe downturn to today.

It is now completely clear that the potential “mid-cycle” slowdown that appeared to be shaping up in late 2007, had been traded for a less severe downturn in the aftermath of the “dot-com” recession, and now has we have fully entered, instead, a mid-cycle meltdown.