Weekly Unemployment Claims Rebound

The Department of Labor reported that weekly unemployment claims increased 24,000 to 399,000 last week, well above consensus expectations of 375,000. This is a very noisy data series and the four-week moving average increased slightly to 381,750, although it has been trending lower since late 2010 as shown on the following graph from Calculated Risk.

It is important to remember that employment data are coincident indicators, so they do not usually provide advance warning of an economic inflection point. The following graph from a recent weekly commentary at Hussman Funds displays the average job growth trend at the beginning of a recession.

The chart provides a good picture of the behavior of non-farm payroll growth in the months before and after a recession begins, based on all U.S. postwar recessions. Notice in particular that in the month a recession starts, payroll job growth has not only been positive in 80% of cases, but has actually been higher, on average, than the three preceding months. Neither the level of job growth nor its short-term trend had any “leading” information content at all about the subsequent direction of the economy.

Notably however, the month following entry into a recession typically featured a sharp dropoff in job growth, with only 30% of those months featuring job gains, and employment losses that work out to about 150,000 jobs based on the present size of the job force. So while robust job creation is no evidence at all that a recession is not directly ahead, a significant negative print on jobs is a fairly useful confirmation of the turning point, provided that leading recession indicators are already in place.

Given that the leading indicators we monitor continue to signal a highly likely return to economic contraction as we enter 2012, it is also likely that job growth will experience a substantial decline sometime during the next few months, effectively confirming that a new recession has begun. Of course, there are no certainties when it comes to economic forecasting, so it is certainly possible that leading data will improve and the economy will avoid recession. However, we always align ourselves with the most likely scenario, so we will remain positioned for a return to economic contraction until provided with compelling evidence to the contrary.

Category: Commentary, Market Update