Submitted by Edward Harrison of the site Credit Writedowns.
I’m back after a brief hiatus. I would like to present you with some data on jobless claims, an economic data series that will become increasingly important in the weeks and months ahead. The data suggest that a recovery is imminent. This should come as no surprise as everyone is jumping on the recovery bandwagon (Joseph Stiglitz and Nouriel Roubini are just two examples). How robust a recovery we see and whether this recovery is sustainable or leads to a double dip are wholly different questions.
Here are the data. In the week ended 16 May 2009, there were a seasonally-adjusted (SA) 631,000 initial claims for unemployment in the U.S. While this was 12,000 fewer than the previous week, continuing claims continued an upward trajectory. A SA record 6.66 million continuing claims for unemployment were filed in the week ended 9 May 2009. What should be clear from these two data points is that the employment market in the U.S. is weak and those being laid off are finding it hard to find jobs.
However, this week’s data reveal a more positive message underneath the gloom. Back in June of last year, I mentioned that jobless claims had a very good track record of predicting recession and recovery (see my post “Another Perfect Recession Indicator”. I mentioned in that post that a particular series I tracked (the yearly change in continuing claims) gave an indication that recession began in December 2007. Now that we have been in recession for nearly a year and half, both initial jobless claims and continuing claims are suggesting that the recession will end later this year.
With initial claims, I am now looking at a 4-week average of the unadjusted numbers and comparing them to levels one year ago. If these comparisons start declining, that is a good sign. I am also doing the same exercise with continuing claims. And in the past, this has been a fairly good indicator of an end to recession. Look at the charts below.
What you should notice in the charts above is that the yearly change in both initial and continuing claims has peaked right at the time the recession ends in all recessions since 1967 when the data series began.
In this particular recession, the initial claims comparison peaked in January and the continuing claims comparison reached a (temporary?) peak last week. To be more specific, the year-on-year change in 4-week average unadjusted initial jobless claims reached a high of 327,590 on 31 Jan 2009 and the year-on-year change in 4-week average unadjusted continuing claims reached its current peak of 3,361,267 on 2 May 2009, declining slightly for the last week that is available. Whether the continuing claims peak holds is an open question. But both initial claims and continuing claims are now pointing to a recovery. And, by the way, you should notice that actual continuing claims have been declining for three weeks. Seasonal adjustments have sent them higher.
Assuming the continuing claims series change has peaked or will soon peak, the obvious question is this: “Why is this recession different?” Before I answer that question, I should point out what recession is and is not. “A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” (see my post “Economic recovery and the perverse math of GDP reporting”). So a recession basically measures the first derivative. That means a recession is over when the first derivative or the change in employment, income, GDP, and sales turn up. An end of a recession does not mean the economy is firing on all cylinders. It does not mean that the economy has returned to its previous level of output. Hardly, when a recession ends, output is always less than when it began – this is axiomatic. By definition, if recession lasts only as long as the change in economic variables is negative, output is going to be lower when it is over than when it began.
So, I see the end of recession as a much less important event than the media certainly seems to. And for the record, I have said I see a recovery happening probably in Q4 2009 or Q1 2010 (see my post “The Fake Recovery”).
The real question is how robust a recovery are we going to have and this is directly related to why the jobless claims series has been sending a false signal. Now, initial claims has been sending a recovery signal since January. Yet, continuing claims continued to rise more quickly until last week. In the past, one had seen these two series as harbingers of imminent recovery. But, I am talking Q4 here. Why? Deleveraging.
In the end, consumers are going to be forced to reduce debt and save more in this more cautious financial environment. Team Obama does seem intent on re-kindling animal spirits but the personal savings rate has gone up nonetheless. This will be a drag on GDP growth going forward and means that the economy’s rebound will be more tenuous and slower to develop. In my view, this means recovery will be delayed and once it gets going it will be weak. The potential for a double dip is very high.
So, to be clear, first derivatives are starting to turn up and since recession is a first derivative event, we are probably going to see an end to this recession soon enough. But, with structural problems still remaining, the U.S. economy will be weak for a long time to come.
Unemployment Insurance Weekly Claims Report – U.S. Department of Labor