Thursday, October 29, 2009

Mid-Cycle Meltdown!: Jobless Claims October 29 2009

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims decreased 1,000 to 530,000 claims from last week’s unrevised 531,000 claims while “continued” claims decreased 148,000 resulting in an “insured” unemployment rate of 4.4%.

As with the last few weeks, today’s results indicate that initial claims are continuing to stay elevated while continued claims is presenting a slow descent.

It's important to consider that with net non-farm payrolls (as well as likely job hires and job openings) still firmly in decline, declines to the continued claims series are could largely the result of many recipients simply reaching the end of their benefit period.

Are we on the verge of a new upturn in joblessness or just in a slow trend down from last year’s epic shakeout?

If firms go for another substantial round of layoffs and job cuts during the fall to early winter (…the typical period of increasing job cutting activity regardless of economic conditions) we could see an unemployment super-spike form whereby two years of significant job cutting activity merge into one large period of unemployment.

Of course there are many ways that the job picture could trend but if firms underestimated their cutting last year and need to cut even deeper this year, it would clearly differentiate this period from most of the past post-WWII recessionary periods.

Clearly, careful attention needs to be paid to these indices to see how they reflect the state of the job market as we move further into the second half of the year.


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 and vice versa.

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 did on several occasions) 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 been 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 resulted, instead, in a mid-cycle meltdown.