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.”
Initial Claims
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
(L0L) IN THIS ECONOMY IT SERVES NO PURPOSE: DOES A TREE FALLING IN THE WOODS MAKE A SOUND IF THERE IS NOBODY THERE TO HEAR IT?
PAYING OUT UNEMPLOYMENT IS A POLITICAL AS AWARDING HIGH SCHOOL DIPLOMAS; AND, WE HAVE A SIZABLE POPULATION WITH NOT READING COMPREHENSION SKILLS.
I’LL TELL YOU WHY JOB CLAIMS DON’T MATTER A WHOLE LOT:
# SOME PEOPLE WILL NEVER APPLY FOR UNEMPLOYMENT.
# MANY LOW PAY EMPLOYERS WON’T HIRE YOU IF YOU WERE ON UNEMPLOYMENT AND THEY DO PUT THAT ON THE JOB APPLICATION–LIKE BARNES AND NOBLE FOR EXAMPLE.
# ONE TIME I WAS DENIIED THE RIGHT TO APPLY. AND BECAUSE THE STATE WOULDN’T ALLOW ME TO APPLY I COULDN’T APPEAL.
# STATES IN TIMES OF HIGH UNEMPLOYMENT FIND ALL WAYS TO KEEP THEIR ROLLS LOW:
## LIKE I JUST SAID YOU CAN’T SIGN UP.
## IT WILL TAKE 6 TO 8 WEEKS TO GET YOUR FIRST BENEFIT CHECK WHICH WILL PROBABLY COVER A WEEK OR LESS–AND WHEN YOU GO BACK TO WORK THE GOVT DOESN’T MAKE UP THE LATE PAYMENTS.
## YOU ASK IF YOU CAN VISIT YOUR SICK MOTHER IN ANOTHER STATE AND THE STATE SAYS SURE GO AHEAD. THEN YOU COME BACK AND LOSE YOUR BENEFITS.
## YOU QUALIFY BUT ARE TOLD BY THE STATE THAT YOU DON’T THEN YOU HAVE TO APPEAL. WHEN MY MOTHER WORKED AT THE APPEAL LEVEL THE STATE WAS SUED BECAUSE THEY HAD A 10YR BACKLOG. SO THE STATE HIRED MORE PEOPLE TO CLEAR OFF THE BACKLOG AND BEGAN PROCESSING CLAIMS ON THE TOP OF THE PILE!
# THE STATE GOVTS STEAL FROM THE UNEMPLOYMENT FUND JUST LIKE THEY DO FROM THE MEDICAID FUND. READ THE SOCIAL SECURITY LAW SECTION ON UNEMPLOYMENT. IT IS FULL OF WARNINGS ABOUT THAT.
MANY YEARS AGO I READ A BOOK ON THE HISTORY OF THE “WELFARE SYSTEM” IN THIS COUNTRY ALL THE WAY BACK TO PLYMOUTH ROCK. AMERICANS DON’T BELIEVE IN HELPING OTHERS IF THERE ISN’T SOMETHING IN IT FOR THEM.
I WAS TIRED THE DAY YOU WROTE ABOUT EUROPEAN BANKS AVOIDING THE GERMAN BANKS. WELL IT IS RUMOR THAT DEUTCHE BANK AND ITS BUDDIES ARE SITTING ON A MOTHER LOAD OF OIL DERIVATIVES. I’VE ALSO HEARD THAT CITI BANK IS A SAUDI BANK AND IS SITTING ONT ON $58 BN OF OIL DERIVATIVES.
I’VE ALSO HEARD–AND I’M WAITING FOR HISTORY TO MAKE THEM LOOK SMART– THAT WHEN GOLD DROPS BELOW $30 A BARREL THAT WILL SET OFF ALL OF THE OIL DERIVATIVE CONTRACTS IN EITHER JANUARY OR FEBRUARY. WELL NOTHING HAPPENED IN JANUARY I JUT LOOKED AND WTI IS AT $30 A BARREL (WONDER IF THAT IS THE WORK OF THE PLUNGE PROTECTION TEAM) AND PRENT IS AROUND $29. MY CEILING HASN’T CAVED IN.
THROUGH READING ABOUT THE 2008 CRISIS AND BOOKS EXPLAINING THE NEW ECONOMY I’VE CONCLUDED THAT THE DERIVATIVE SCARE IS ANOTHER SCAM.
THE MORTGAGE BUBBLE HAD MANY DIFFERENT SCAM THAT A VARIETY OF PEOPLE FED OFF OF DURING THE DECADES IT INFLATED. THE KEY THING IS THAT BY 2008 A HOUSE WORTH SAY $300,000 WITH A $500,000 MORGAGE (GRATIS THE PRIVATE MORTGAGE COMPANIES AND WARREN BUFFETT) THEN THROUGH SLICING, DICING AND SHORTING THAT $500,000 BECAME A $10,000,000 MORTGAGE. SO WHEN CONGRESS GUARANTEED THE DEBT THEY ESSENTIALLY COMPLETED A COUNTERFEITING SCAM.
ANY WHO, FROM MY READING IT SEAMS THAT THE DERIVATIVE MARKET ACCOMPLISHES 2 THINGS:
(1) SHORE UP THE DOLLAR IN A WORLD WHERE THE PETRO DOLLAR IS TURNING INTO A MIRAGE.
(2) CREATE A ECONOMIC CRISIS WHERE THE IMF COMES IN AND DECLARES AUSTERITY AND THE MULTI NATIONALS COME IN AND BUY OFF EVERYTHING AT PENNIES ON THE DOLLAR.
THE JOKE IS THAT ALL THOSE $400TR IN DERIVATIVE CONTRACT ARE MADE BTWN THE BIG MULTI NATIONAL BANKS AND ARE DEMONIATED IN USD. NO MONEY IS PUT DOWN WHEN THE BET IS MADE. AND WHEN THE EVENT OCCURS NO MONEY IS EVER PAID OUT. IT IS BASICALLY LIKE THE STERILIZED MONEY OF THE US TREASURY — CARIBBEAN BANKING CNTR/ EUR CLEAR–AND THE FEDERAL RESERVE.
MONEY GOES AROUND AND AROUND THROUGH THE IMF COUNTER AND UP GOES THE USD ON THE FOREX.
IF, OBAMA DOESN’T START A WAR FIRST, I AM BETTING THAT PUTIN FINDS A POLITICAL SOLUTION TO THE PROBLEM. AND MY GUESS IS, IT WILL BE THE POLITICAL SEIZURE IF THE IMF (AND BIS). IREMEMBER IN THE 1970IES WHEN EVERYONE WAS CURIOUS HOW THE IMF EXACTLY PRICES MONEY. THE ANSWER WAS, IT WAS POLITICS. THE BIG COUNTRIES CALLED THE SHOTS. THIS SEPT THE RMB BECOMES A RESERVE CURRENCY (RMB AND RBL ARE ALREADY CONVERTIBLE) AND IN NOV THE ELECTIONS TAKE PLACE. I’M BETTING THAT SOMETIME BTWN ELECTIONS AND THE INAUGURAL SOMETHING OF GREAT HISTORICAL IMPORT WILL OCCUR.
Please turn off the caps lock
Mish – good analysis. I would ADD the propensity of companies to use “temps” and “contractors” now, neither of whom may be eligible for benefits depending on the state.
It is interesting to note that the unemployment “covered” number gained 1.3 million LESS people than the jobs numbers from 2008 to now.
I agree with your point about using temps and contractors. I’m a contractor at a global corporation where 20% of my co-workers are not employed directly by the company. So basically the company is planning for at least 20% of the work to dry up.
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Government statistics are incredible.
Mish – good analysis. I would ADD the propensity of companies to use “temps” and “contractors” now, neither of whom may be eligible for benefits depending on the state.
many employers will not hire you for a full time role if you have had too many temp or contract roles
Often detecting a change in trend means looking at how far the present data point has dipped below a certain threshold. The commonality among the start of the recessions MISH identifies is the employment number had fallen to about a half of its cycle high. So setting a 20-25% drop in the number of jobs added relative to the cycle peak would be another strong macroeconomic indicator of a recession taking place. The data isn’t there yet, but a rounded top similar to previous tops has formed.
Weekly claims and average manufacturing workweek are leading indicators, monthly payrolls are a coincident indicator, and the unemployment rate is a lagging indicator. It’s the jobs data that most strongly refutes anybody who believes a recession was entered in the last few months. I don’t believe there have been pay cuts collectively taking place; that would really be unusual.
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