Friday, August 21, 2009

Mid-Cycle Meltdown!: Jobless Claims August 20 2009

Yesterday, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims increased again jumping 15,000 to 576,000 claims from last week’s upwardly revised 561,000 claims while “continued” claims increased 2,000 resulting in an “insured” unemployment rate of 4.7%.

Hold on a minute…

For a few weeks I had been suggesting that both initial and continued claims appeared to be teasing out a peak though now that assumption may be called into question.

As I had noted in July, there is a real chance that this downturn may bring an unemployment super-spike… a condition (…that occurred in the double-dip recession of the 80s) whereby two years of layoffs (… effectively multiple rounds), unite to one very large period of unemployment.

It’s important to note that the period from September to mid-January brings the most significant number of layoffs regardless of economic conditions.

It’s altogether possible that with the latest weeks of increasing initial unemployment claims, we are getting a preview of the trend that will unfold this fall.

If the second half disappoints, and the “recovery” of Q1 and Q2 shows itself to be either very weak or not a recovery at all possibly with stocks testing the lows… we could be in for another significant round of layoffs.

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 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.