The Chronic Pain Of Jobless Claims

The risk of a new recession is higher, but it’s not obvious that it’s at the tipping point. A number of traditional indicators that have an encouraging history of dispensing early warning signs are still in the growth column, if only slightly. But there’s also a set of deteriorating numbers that counteract the positives, as today’s update on new jobless claims reminds. No wonder that some analysts say there’s a 50/50 chance of a downturn.

The latest data point is hardly a reason to think otherwise. New filings for unemployment benefits inched higher last week by 2,000 to a seasonally adjusted 414,000. At the very least, we’re stuck in an elevated range, which offers little hope that the labor market will pull out of its slump in the near future. Even worse, there are signs that the trend may be set to rise. The four-week moving average of claims, which is quite volatile on a weekly basis, increased to nearly 415,000 last week, the highest since mid-July.

Equally worrisome is the year-over-year percentage decline for the unadjusted numbers, as shown in the second chart below. New claims are still falling vs. the year-earlier period, but the margin of safety is shrinking again. Rising claims on an annual basis for this series (if it comes to that) alone wouldn’t necessarily predict a new recession. But further deterioration here would be troubling, given the general weakness in job creation these days.

For now, the message is more of the same: the labor market is stuck in a rut. There’s minimal job creation in the private sector and today’s jobless claims report implies that we’ll see more of this in the weeks ahead. “It’s suggesting sluggishness rather than a dramatic new weakening,” says Jim O’Sullivan, chief economist at MF Global. “Recessions are associated with claims shooting up and so far that hasn’t happened.”
Optimism has been defined down in recent weeks. You’re in the glass-is-half-full group if you’re expecting that the economy will avoid a recession while suffering little or no job growth. In that case, we’re transitioning from what was a low-job-growth recovery to a true jobless recovery.
“Jobless claims numbers have been stabilizing in recent weeks,” advises Gary Thayer, chief macro strategist at Wells Fargo Advisors. “We’re probably seeing an economy that’s just growing slowly.”
The problem is that an economy that grows slowly and produces minimal jobs is an economy that’s at an elevated risk. “When the growth rate gets low enough, certain factors may kick in, nonlinearly,” explains economist Menzie Chinn, co-author of newly published Lost Decades: The Making of America’s Debt Crisis and the Long Recovery.
And as David Leonhardt of The New York Times notes today:

…the main significance of the recent slowdown is that the economy may not merely be going through a weak phase that will soon pass, as many policy makers hope. Instead, history seems to suggest that the situation will probably get worse before it gets better.

In a recent research paper, Jeremy J. Nalewaik, a Federal Reserve economist, described this concept as “stall speed”: once the economy slows markedly, it often continues to do so. (He did not make a forecast.) In the other two severe downturns of the last 80 years — in the 1930s and the early 1980s — the economy suffered just such a stall and fell into a second recession not long after the first.

So while the jobless claims numbers aren’t soaring, they’re not falling either. Eventually, the distinction may not matter much, and for all the wrong reasons.