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Initial Claims - No Clear Signal
Highlights include The TJX Companies, Inc. (TJX - Snapshot Report), Saks Inc. (SKS - Analyst Report), Colgate-Palmolive Co. (CL - Analyst Report) and Johnson & Johnson (JNJ - Analyst Report).
Intial claims for unemployment fell 12,000 to 631,000. The four-week moving average dropped a slight 3,500 to 628,500. The four-week average is a key indicator at turning points in the economy -- when it peaks out it usually means that the official recession is over. We had started to see it decline, but then it reversed last week, and this week’s very small decline is somewhat encouraging, but not very decisive. Looks like we will have to watch it closely for another few weeks.
A year ago, initial claims were at 374,000 and we were losing jobs at that point, so this small drop we have seen does not indicate the employment picture is improving. Continuing claims continued to rise, up 75,000 this week to 6.66 million (a very devilish number indeed), its 16th straight record high. A year ago, continuing claims were at just 3.06 million. This indicates that on average claims have been going up at 69,200 per week over the last year.
However it has not been even, and there was a much faster rise earlier this year, rising at over 115,000 per week since the start of the year. Thus, even on continuing claims there is some slight indication of stabilization. The continued rise in continuing claims in the face of stabilizing to moderately dropping initial claims indicates to me that we have a blockage at the other end.
While the pace of layoffs may be stabilizing, the pace of new hiring is not picking up. As the chart below indicates (larger version available at http://www.calculatedriskblog.com/) continuing claims tend to peak out at the same time as, or just slightly after, the four-week average of initial claims does. However, the last two recessions were much more "mesa"-shaped than the peaks that characterized earlier downturns.
One result of this is that it has turned the unemployment rate from being a coincident indicator to a lagging indicator. As the second chart shows, the unemployment rate in the distant past always started to fall almost immediately after the recession was over, but that was not the case in the last two recessions.
After the early 1990’s recession, the unemployment rate did not peak for 15 months afterward, and in the 2001 downturn it took 18 months to see the unemployment rate start to fall after the end of the recession (as dated by the NBER). I suspect this is because, over time, manufacturing has become a less and less significant share of total employment in the country.
Recessions always hit manufacturing workers hard, but they tend to be called back to work quickly once the economy starts to turn around. One of the effects of this recession has been that when people are out of work, they tend to stay out of work longer than they used to. For any given unemployment rate, the median duration of unemployment has gotten longer.
Thus, even though the unemployment rate is still well below the peak (10.8%) at the end of the 1982 downturn, the length of unemployment is already significantly longer at 12.5 weeks rather than the 10.2 weeks it was at the point of peak unemployment (it did later rise to 12.3 weeks five months later). The current unemployment rate is almost identical to the peak of the mid-1970’s downturn (8.9% vs. 9.0 then), yet the median duration of unemployment is already almost a third longer at 12.5 weeks rather than the 9.5 weeks which was the worst associated with that downturn.
The current level of initial claims is about what we saw in February. In February, the economy lost 681,000 jobs, and in March it lost 699,000. It is hard for me to see how with the current level of claims we will not lose less than 600,000 jobs. Depending on how many people become "discouraged" and leave the work force (or become encouraged and restart their job search) this would probably mean that the unemployment rate (U3) will rise to about 9.3% in May. That would exceed the low end of the Fed’s central tendency for unemployment in the fourth quarter (range 9.2% to 9.6%).
The rise in unemployment will keep pressuring consumer spending downward. If you have to invest in retail, go with the discounters. Think T.J. Maxx (TJX - Snapshot Report), not Saks (SKS - Analyst Report), as people will continue to pinch their pennies.
Even though they have lagged in the big bounce since early March, I continue to favor large, strong companies with bullet-proof balance sheets and which make products that people need, rather than just want -- things that they will buy regardless of how the economy is doing. Two names that come to mind that fit that description are Colgate-Palmolive (CL - Analyst Report) and Johnson & Johnson (JNJ - Analyst Report).
Intial claims for unemployment fell 12,000 to 631,000. The four-week moving average dropped a slight 3,500 to 628,500. The four-week average is a key indicator at turning points in the economy -- when it peaks out it usually means that the official recession is over. We had started to see it decline, but then it reversed last week, and this week’s very small decline is somewhat encouraging, but not very decisive. Looks like we will have to watch it closely for another few weeks.
A year ago, initial claims were at 374,000 and we were losing jobs at that point, so this small drop we have seen does not indicate the employment picture is improving. Continuing claims continued to rise, up 75,000 this week to 6.66 million (a very devilish number indeed), its 16th straight record high. A year ago, continuing claims were at just 3.06 million. This indicates that on average claims have been going up at 69,200 per week over the last year.
However it has not been even, and there was a much faster rise earlier this year, rising at over 115,000 per week since the start of the year. Thus, even on continuing claims there is some slight indication of stabilization. The continued rise in continuing claims in the face of stabilizing to moderately dropping initial claims indicates to me that we have a blockage at the other end.
While the pace of layoffs may be stabilizing, the pace of new hiring is not picking up. As the chart below indicates (larger version available at http://www.calculatedriskblog.com/) continuing claims tend to peak out at the same time as, or just slightly after, the four-week average of initial claims does. However, the last two recessions were much more "mesa"-shaped than the peaks that characterized earlier downturns.
One result of this is that it has turned the unemployment rate from being a coincident indicator to a lagging indicator. As the second chart shows, the unemployment rate in the distant past always started to fall almost immediately after the recession was over, but that was not the case in the last two recessions.
After the early 1990’s recession, the unemployment rate did not peak for 15 months afterward, and in the 2001 downturn it took 18 months to see the unemployment rate start to fall after the end of the recession (as dated by the NBER). I suspect this is because, over time, manufacturing has become a less and less significant share of total employment in the country.
Recessions always hit manufacturing workers hard, but they tend to be called back to work quickly once the economy starts to turn around. One of the effects of this recession has been that when people are out of work, they tend to stay out of work longer than they used to. For any given unemployment rate, the median duration of unemployment has gotten longer.
Thus, even though the unemployment rate is still well below the peak (10.8%) at the end of the 1982 downturn, the length of unemployment is already significantly longer at 12.5 weeks rather than the 10.2 weeks it was at the point of peak unemployment (it did later rise to 12.3 weeks five months later). The current unemployment rate is almost identical to the peak of the mid-1970’s downturn (8.9% vs. 9.0 then), yet the median duration of unemployment is already almost a third longer at 12.5 weeks rather than the 9.5 weeks which was the worst associated with that downturn.
The current level of initial claims is about what we saw in February. In February, the economy lost 681,000 jobs, and in March it lost 699,000. It is hard for me to see how with the current level of claims we will not lose less than 600,000 jobs. Depending on how many people become "discouraged" and leave the work force (or become encouraged and restart their job search) this would probably mean that the unemployment rate (U3) will rise to about 9.3% in May. That would exceed the low end of the Fed’s central tendency for unemployment in the fourth quarter (range 9.2% to 9.6%).
The rise in unemployment will keep pressuring consumer spending downward. If you have to invest in retail, go with the discounters. Think T.J. Maxx (TJX - Snapshot Report), not Saks (SKS - Analyst Report), as people will continue to pinch their pennies.
Even though they have lagged in the big bounce since early March, I continue to favor large, strong companies with bullet-proof balance sheets and which make products that people need, rather than just want -- things that they will buy regardless of how the economy is doing. Two names that come to mind that fit that description are Colgate-Palmolive (CL - Analyst Report) and Johnson & Johnson (JNJ - Analyst Report).