Diminished Expectations For Tomorrow’s Employment Report

A week ago I asked if we should see late-September’s sharp drop in weekly jobless claims as a sign of things to come. Today we have an answer, at least for the moment. New filings for unemployment benefits rose last week by 6,000 to a seasonally adjusted 401,000. As always, we shouldn’t read too much into the latest data point in this volatile series. But it was just too tempting to surrender to a bit of optimism last week when jobless claims dipped under the 400,000 mark for the first time since the spring. Oh, well—another jobless claims report, another disappointment.

But let’s not be too dramatic. The real story is that nothing much has changed. That’s not good, but it may not be the stake in the economy’s heart either. The labor market is stuck in neutral, as the past six months of a trendless trend for jobless claims reminds. As a critical leading indicator for both the labor market and, by extension, the broad economy, there’s no way to mask the darkness in these numbers. The best you can say is that the trend isn’t getting any worse. That’s no reason for celebration, but it’s still better than a sustained rise, which would be fatal. Instead, jobless claims remain near the lowest levels since the recession formally ended in June 2009, and that’s better than nothing. Still, the lack of continued progress this year is a sign that the forces of recovery have gone into hibernation (or worse?).

The blowback is showing up in many corners, not the least of which is the flat-lining in continuing claims, a measure of unemployed workers already receiving benefits. The correlation between initial and continuing claims is strong and so it’s unlikely that the ranks of the jobless are set for a substantial decline any time soon.

Perhaps the lone bright point in the claims data is the fact that the year-over-year percentage change in the unadjusted weekly numbers continues to fall at a robust rate–dropping by around 12% vs. this time a year ago at last count. But even that healthy change doesn’t tell us much these days since it doesn’t reflect the ongoing stagnation in the trend since this past spring. If the economy’s set to perk up, the change will likely show up in a renewed drop in new jobless claims. That was true last year, when claims began dropping in early fall, signaling the short-lived economic and market revival.
But that was then. Today, we’re going nowhere fast with claims data. Without a resumption of progress in the near term, even the 12-month change in claims is headed for zip in the near future. In fact, the upward drift in the 12-month change is warning of no less, as the third chart below shows.

Tomorrow’s employment report for September is expected to at least offer a more encouraging update compared with August’s dismal numbers, as yesterday’s ADP estimate of the labor market suggests. But short of a surprisingly strong rise in the government’s job creation tally, the case is strong for thinking that the economy will continue to struggle… at best.
John Hermann, a fixed-income strategist at State Street, sums up the mood when he says that “we have more or less a freeze on headcount. We’re in a wait-and-see mode.”
But the jury’s still out on whether all this leads to a new recession. There are signs that the economy has yet to give into the forces of contraction. The modest growth implied in the September readings of the services and manufacturing sectors via the ISM surveys tell us that the economy is still expanding, if slowly. And let’s not forget that yesterday’s ADP report advises that the labor market, while tepid, continues to mint new jobs on a net basis. But all this must be weighed against a rising tide of deterioration on other fronts—a deterioration that some analysts warn has brought us to the point of no return for the business cycle.
Forecasting a new contraction may still be premature, but it’s hardly a radical notion at this stage. That alone is enough to worry. Maybe tomorrow’s employment report will tell us different. Anything’s possible, but today’s jobless claims update recommends caution for expecting miracles.