September 15, 2011
How Much More Of This Can The Economy Take?
Initial jobless claims are moving higher again. It’s not terribly surprising after another summer of economic discontent. In recent weeks there was some hope that new filings for unemployment benefits (a key leading indicator) was stuck in neutral, albeit at elevated levels. Now even that thin reed seems to be giving way as the numbers edge higher. Maybe it's noise; maybe we're in another one of those extended head fakes that have plagued these numbers several times in the recent past. Maybe, maybe, maybe.
What we do know is that new claims rose 11,000 last week to a seasonally adjusted 428,000, the Labor Department reports--the highest since late-June. It takes an enormous amount of confidence to dismiss this increase once you also consider that the four-week moving average for this series has been rising steadily for the past month. The implication: This is not a drill.
Jobless claims are notoriously volatile, of course, and so that's our cue for looking at the annual change in the unadjusted numbers in search of a more reliable measure of the trend. But here too there’s more bad news. New claims are down by 4.6% vs. a year ago, but that’s the smallest annual drop since early May, as the second chart below shows. The margin of comfort grows thinner by the week.
Readers of this site know that I’ve been slightly optimistic that the U.S. would avoid a recession. Part of that analysis has been that unadjusted claims falling by 10% or more on a year-over-year basis isn't the stuff that recessions are made of. The continuing deterioration of jobless claims, however, suggests that it may be time to reconsider. Much depends on what happens next, of course, but based on what we know now the trend doesn't look healthy.
Adding to the burden is the high levels of continuing claims numbers. For the week through September 3 (this series is released with a one-week lag relative to initial claims), continuing claims totaled a seasonally adjusted 3.726 million. In nearly half a century of history for this series, those numbers have only been associated with recessions. Unfortunately, continuing claims are stuck in the clouds, suggesting what’s been obvious for some time: the labor market isn’t healing. Even if you adjust for population growth, these numbers don't look good.
Unless we start to see a change for the better in jobless claims, and soon, the business cycle’s fate may be sealed. The hour is late and the numbers are disappointing. A sharp reversal of the Fed’s passive tightening might be able to buy some time, but politics may have already short-circuited this option.
If I had to come up with odds, I’d say the chance of a new recession is now 50/50, which is to say that I’m a bit more pessimistic than I’ve been in recent weeks. But there are still several indicators that keep hope alive. One is the stock market, which has yet to go negative on a year-over-year basis. No recession in the last 50 years has started without a sustained decline in the S&P 500 on an annual basis. For the moment, the market’s still in positive territory by 6% as of yesterday vs. 12 months previous. Mr. Market is keeping his chin (and prices) up.
There’s also the upwardly sloping Treasury yield curve to consider. History suggests that until short rates exceed long rates, the odds for another recession are low. By that accounting, the fact that the benchmark 10-year Treasury yield is 200 basis points over the three-month T-bill yield of zilch offers some comfort. Then again, the yield curve has been manipulated on the short end by more than the usual degree, a fact that some analysts say diminishes the value of this indicator this time.
Perhaps, although there are other corners of optimism to consider, including the annual change in retail sales, as I discussed yesterday. Even so, if the all-important labor market continues to weaken from an already weakened state, well, the blowback may be enough to overcome whatever good news is out there. Indeed, we’ve been warned that this risk is rising via the August jobs report, the weakest since the so-called recovery began.
Another shot across employment’s bow arrived in today’s jobless claims numbers. As Scotty told Kirk many times: “We can't take much more of this, Captain!” That just about sums up the state of macro.
Posted by jp at September 15, 2011 9:45 AM
Ellis' favorite indicator, real hourly wage is dropping. Also, real consumer spending is dropping. No consumer, no government stimulus mind-set, corporations stockpiling cash... what is going to turn things around?
Posted by: carl at September 18, 2011 5:45 PM