Jobs are well understood to be a lagging indicator, but economists cling to the notion that initial unemployment claims lead.
Despite stress-free readings in initial claims, Economists, CEOs: say Recession Risk Rising. The Wall Street Journal calls this a “divergence of opinion“.
The odds of recession in the next 12 months have climbed to 21%, double the level of a year ago and the highest since 2012, according to the average estimate in The Wall Street Journal’s monthly survey of economists. Economists at Bank of America Merrill Lynch peg the chance of recession in the next 12 months at 25%.
Fed Chairwoman Janet Yellen said Thursday in testimony before the Senate Banking Committee that she sees several risks to the U.S. economy and that the central bank is carefully monitoring global financial markets and economic developments that could affect growth.
But she reiterated her view that a contraction isn’t imminent. “There is always some chance of a recession in any year, but the evidence suggests expansions don’t die of old age,” Ms. Yellen said. “It is not what I think is the most likely scenario.”
The last seven recessions all ended with a sudden drop in initial claims following a spike high. In contrast, the last seven recession starts were nebulous at best. They did start from a bottom, but signals certainly were not clear.
Is there any reason to suspect initial claims will be even more nebulous this go around? Yes, many reasons actually.
- Demographics. Boomers close to retirement age and losing their job may take a package and be done with it.
- Many people are working multiple part-time jobs. Those losing one of two jobs are still employed and unable to collect benefits.
- Corporations run pretty lean. The next go around may see reductions in hours rather than spikes in claims.
Finally, I have been pondering a “Job Gain Recession”
A chart of year-over-year nonfarm employment shows that’s nearly what happened in the 1970 and 1980 recessions.
Nonfarm Payroll Job Losses
Jobs a are a horribly lagging indicator. Recessions invariably start with the economy adding jobs as noted by the red squares in the above chart.
Job losses in recessions vary widely. At the deepest point of the 1980 recession, the maximum year-over-year loss in nonfarm jobs was only 378,000. In contrast, the economy shed 6.8 million jobs in the 2007-2009 “great recession”.
The peak of the job losses in most recessions is after the recession is over.
What Would a Job Gain Recession look like?
- Reduced hours, especially for part-time employees.
- Workers might lose just one of two part-time jobs making them ineligible for unemployment insurance.
- Corporate earnings take a huge hit as companies cannot shed enough employees.
- Stocks get trashed in the earnings hit.
- Yields on government bonds sink to new lows.
- Yields on corporate bonds rise with increasing default risk.
- Consumer price deflation would again come into play as consumers further cut into spending.
- Rate hikes would be the last thing on the Fed’s mind. Cuts would be likely.
- The Fed would strongly consider negative rates even though negative rates would make the situation worse.
- In terms of job losses, this would look like a “mild recession”, but it would wreak havoc on the financial system, especially leveraged players.
Too much faith has been placed in factors that appear nebulous at market tops even if the indicators work at market bottoms.
Mike “Mish” Shedlock