As a matter of analytical preference, we like datasets that offer an exact count over those that are survey-based. The monthly US Employment Situation Summary, aka the first-Friday Jobs Report, is an example of the latter. And while the numbers there are good – and inform Federal Reserve policy – they are only based on a sample of the US population.
By contrast, the Unemployment Insurance Weekly Claims report, which comes out every Thursday morning, is a hard count of actual workers claiming their first unemployment check. The only wrinkle here is the seasonal adjustment factor:
- Initial claims are deeply informed by seasonal variations.
- The second week of January is the peak as retail stores release Holiday workers. The end of summer is the trough.
- The variance between the annual low and high spots: over 100%.
- To wash out some of that weekly churn, we use 4-week rolling averages of initial claims.
We bring all this up because Initial Claims have become a bearish talking point in the last 3-6 months; here’s why:
- September 2018 saw a post-Great Recession low for Initial Claims, with 4-week rolling averages of 206,000 – 207,000.
- Since then, they have moved higher. The last reading was 225,000 and in mid-February they were 236,000.
- It doesn’t take much imagination to draw a line from Q4’s equity market volatility to this recent increase in Claims and wonder if markets are sensing a peak in US labor market conditions. And, of course, the S&P hit its all time peak just as claims hit their cycle lows-to-date.
At the same time, it is important to put the Initial Claims data into some longer-term historical perspective:
- The last time Initial Claims were this low was in early 1973. The US workforce back then numbered 88 million people; it is now 163 million, or 85% larger.
- While Initial Claims bottomed at about 300,000 in the 1980s (1989), 1990s (early 2000), and 2000s (2006), the US workforce was growing consistently though those expansions. Therefore, each nadir reflects a lower percentage of the overall workforce than the prior cycle.
- Conclusion: Initial Claims, when adjusted for the size of the US workforce, have been in structural decline since the 1970s. Even the peaks reflect the same phenomenon. The high point in March 2009 (659,250 4-week average) was actually lower than in October 1982 (674,250).
- Why is this happening? The easy answer is that unemployed workers are either not filing for their benefits and/or work in the sorts of jobs that are too short-term to allow for the accrual of these benefits.
Now, if you still want to use the short-term change in Initial Claims as a sign of a weakening US economy and a teetering equity market, here are a few pointers based on the historical record:
- Let’s assume we “know” that the current cycle trough was last September at the aforementioned 206,000 4-week average level. Current readings put us 9% higher than that at 225,000.
- In the 1980s, the trough was in February 1989 at 287,000 for the 4-week average. They then rose by 12% through April 1st. By October, they were 26% higher.
The S&P 500 rose by 31.5% in 1989.
- In the 1990s, the trough reading was actually in April 2000 at 266,750. It rose 17% through August and was 30% higher by the end of the year.
The S&P 500 fell by 9.3% in 2000.
- The low water mark for Initial Claims in the 2000s was in February 2006 at 4-week average of 286,500. They then rose by 15% through May but were stable through the rest of the year.
The S&P 500 rose by 15.6% in 2006.
The upshot here in 2 points:
#1: At a 9% increase in 4-week average Initial Claims since the September 2018 lows, we’re not yet seeing the sort of deterioration that signaled prior definitive lows in the 1980s, 1990s or 2000s. The uptick could, therefore, be statistical noise rather than signal.
#2: Even if we see further increases in Initial Claims in coming weeks, stock market history says it isn’t necessarily a death knell for US equities. It may even encourage the Federal Reserve to reconsider its do-nothing stance, at least at the margin.
And a final, more cautious, thought: we think about Initial Claims through the lens of a stock market analyst rather than economist. Specifically:
- We know that US companies are facing an earnings recession in Q1 and Q2 2019. The FactSet analyst estimate data is clear enough on that point: -3.7% expected bottom line growth in Q1, and just 0.1% in Q2 (and that number is coming down).
- The problem is not revenue growth; Q1 is supposed to show a 4.6% increase, and Q2 is slated to come in at 4.4%.
- Rather, it is margin contraction at the core of these earnings declines. Labor costs are a piece of that; we’ve seen wage growth accelerate in the last 6 months.
Conclusion: US companies may be able to forestall board and shareholder pressures to cut costs for a quarter or two, but they will eventually have to act if second half growth falls short.
When they come to that conclusion, you’ll see it first in the Initial Claims data. We don’t think the last 6 months of modest increases reflects that, but we’re sure markets will see further increases as one more sign of an economic and market top. Even if the historical data is mixed on that point.