The latest jobless claims report suggests that the labour market continues to remain strong as both initial jobless claims and continued jobless claims decreased compared to the last reporting week as well as the expectations for the reporting week. What is more interesting is that both the figures were actually lower than even the minimum estimates as per several forecasts.
The fact that labour market is strong echoes Fed’s continued faith in the current economic expansion and its sustainability. The challenges for the labour market, if any, might be presented by a weakness in the global economy, the continued trade tensions with China or risks such as financial conditions, systemic risks etc. The same has been feared by the FOMC that cited 3 reasons for the change in its policy stance and the decision to reduce its target federal funds rates in the July meeting. Those 3 reasons were: -
1. Downside risks to the US economy emanating from the weak global growth,
2. Downside risks to the US economy from trade tensions, and
3. Muted inflationary pressures.
Though jobless claims is a leading indicator of economic expansion, these risks don’t seem to spillover to the labour market. However, they, in FOMC’s assessment, have started showing up in manufacturing and investment data, as indicated in the press conference held by the Fed chair. This was the motivation behind calling this latest reduction in the target federal funds rate an “insurance cut” rather than the first in a cycle.
Jobless Claims Data and Market Reaction
Initial jobless claims, as reported by the Department of Labour of US, for the week ending on 3 Aug were 209K, a decrease of 8K from the previous week’s revised level. The previous week’s figure was revised up by 2K from 215K to 217K. The 4-week moving average of initial jobless claims was 212K, a tiny increase from the previous week’s revised average. The previous week’s 4-week moving average was revised up by 0.5K from 211.5K to 212K. The figure was also lower compared to the expectation of 215K. Overall, initial jobless claims continue to move down.
Continued jobless claims for the week ending on 27 Jul were 1684K, a decrease of 15K from the previous week’s revised level. The previous week’s figure was revised as unchanged at 1699K. The 4-week moving average of continued claims was 1687K, a decrease of 11K from the previous week’s revised average. The previous week’s 4-week moving average was revised as unchanged at 1698K. The figure was also lower compared to the expectation of 1690K. Overall, continued jobless claims also continue to move down.
The immediate reaction in US dollar was up, in line with the strong data. However, the upside move of about 0.08% in the US dollar sustained for only 20 minutes before it came crashing down potentially due to the strength in Euro owing to the U-turn in Germany fiscal policy calling for issuance of new debt to finance a climate control package. Dollar eventually ended the day slightly lower than where it was just before the release of the jobless claims data. The reaction in the E-mini S&P 500 futures was different as they rose by 0.14% in the first 20 minutes and then ended the day up by almost 1.7%.
Historical Significance of the Jobless Claims Data
Initial jobless claims are widely recognized as a leading economic indicator as they indicate the emerging labour market conditions. Continued jobless claims, also known as “insured unemployment”, are considered a coincident economic indicator as they roughly coincide with peaks and trough of economic cycles.
The fact that these figures are reported every week and revised the next week also makes them noisy. This is why a 4-week moving average is also calculated which is supposed to reflect the average conditions over the last running month. The average, apparently, is also smoother than the raw figures for both initial and continued claims. Therefore, all the following historical observations are based on the 4-week moving averages rather than the raw data.
Initial jobless claims have historically risen before a recession and not after a recession, making them a leading indicator of the potential of a recession. On an average, initial jobless claims start rising around 9 months before a recession officially begins in the US economy, as measured and declared by the NBER i.e. the National Bureau of Economic Research, an American private nonprofit research organization. Moreover, when the recession begins, the initial jobless claims are at least 100% higher than the minimum level hit just before the recession. This is evident in the following graph that shows the 4-week moving average of the initial jobless claims (blue line) together with the period of recession (grey bars) for last 6 recessions in the US economy.
Moreover, according to a research by St. Louis Fed, initial jobless claims may be useful for forecasting employment growth during periods of increasing economic activity. Another research by the same organization indicated that continued claims provide information that is at least as important as the information provided by the initial claims. All of this reflects the historical significance of the jobless claims data in order to forecast the timing of a recession and the magnitude of employment growth.
Interpretation of the Jobless Claims Data
Based on the observations and research cited in the previous section, we can make following interpretation from the latest release of the jobless claims data.
As the initial jobless claims data stands today, we are nowhere near the 100% level (from the minimum) indicating that the labour market conditions are strong. Since, none of the last 6 recessions in US started when initial claims were in a declining trend, we can safely say that a consistently falling initial jobless claims report keeps the risk of a looming recession at bay.
Initial jobless claims were consistently showing a downward trajectory till May 2018. After that, the initial jobless claims have broadly been hovering around 220K barring 2 episodes in Sep 2018 and Apr 2019 when it declined comfortably beyond 220K. However, continued jobless claims had continued to decline even after May 2018 and it is only after Oct 2018 when they refused to go any lower. Therefore, we believe that jobless claims have broadly been consolidating since Sep-Oct 2018.
The average initial jobless claims from May 2018 till date are 218K. Interestingly, the average initial jobless claims from Sep 2018 till date are also 218K. Since Jun 2019, we have seen another consistent decrease which started at 222.5K and has continued with the latest figures. This latest trend of decrease in the initial jobless claims might take us to the lows of May 2018 or Sep 2018.
Overall, we believe that labour market is strong and potential risks should be exogenous. As long as, labour market remains strong, FOMC will have one less reason to think of another rate cut. Presently, the rationale for more rate cuts owes its origins to worsening trade tensions and weak global growth.
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