Thursday, October 23, 2014

Claims collapse

On a four-week moving average basis, weekly initial claims for unemployment in April 2000 were a few thousand lower than they were last week (top chart), but compared to the size of the workforce, they have never been lower than they were last week (second chart). 

The only potentially disturbing thing about this is that recessions tend to follow lows in unemployment claims. Maybe, if things can't get much better, they are likely to get worse? I think that's a premature concern, if not an meaningless concern. Low levels of firings don't cause recessions. Low levels of firings usually happen when the economy is humming along and inflation is increasing. That—rising inflation and strong growth—is what prompts the Fed to tighten monetary policy, and tighter policy inevitably results in the economy sliding into a recession a year or so later. The current recovery stands in sharp contrast: it's the weakest on record, the Fed has never been more accommodative, and the Fed is probably years away from tightening policy by enough to strangle the economy.

Plus, one of the reasons this is a weak recovery is that the pace of hiring has been relatively tepid. If this were a normal economy we might have as many as 10 million additional jobs by now. Businesses have yet to become euphoric and over-build and over-hire. Businesses instead have been very cautious this time around, keeping their operations lean and mean and their bottom lines strong. This increases the odds that the current recovery still has years of life left. Recessions usually follow periods of over-confidence; confidence today is still relatively low, and caution is still prevalent.

With firings at very low levels, it's not surprising to see that the number of persons collecting unemployment insurance hasn't been as low as it is today for the past 14 years. In less than a year the number has dropped by more than half, from 4.65 million at the end of last year to only 2 million last week. From the all-time peak of 2010, almost 10 million people have dropped off the unemployment claims rolls in just five years.

Those are dramatic changes, especially in an era which transfer payments (unemployment insurance, welfare, food stamps, disability, medicare, social security, etc.) have risen to a new all-time nominal high ($2.5 trillion)) and a new all-time high relative to total federal spending (72%). Never have so few received government assistance for losing their job, and never have so many received so much for not working.

It's not just the weakest recovery, it's the craziest.


Joseph Constable said...

Do note how quickly the claims line rises once it starts.

Perhaps it is different this time. But probably not that different. I buy the case that there could be an extended period of time before things get too hot to handle. And maybe it will be a really long time if the economy doesn’t do better. I don’t think we can have our cake and eat it too. Either the economy stays moderate for a long time or it heats up and the FED tightens. Theoretically they wouldn’t have to tighten if they didn’t loosen. Or is it they wouldn’t have to loosen if they didn’t tighten? Forget it.

Here is what concerns me. I put the chart up on MZM, or M2 own rate FRED chart. Each successive tightening the interest rate is lower before the recession. Now, the rate will be less than 2% when it hits the trend line. And the rate can’t go to a lower low next time.

Or can it? Maybe there is some new paradigm coming along. I wouldn’t know what but it looks like the economy is squeezed into a wedge.

Benjamin Cole said...

Joe---You are correct, the Fed is playing a very dangerous game. Likely the USA will hit the next recession with interest rates still in very low single digits.

At that point the Fed will have little choice but to go to quantitative easing - yet central bankers dislike quantitative easing.

Call it, the United States of Japan.

steve said...

rather think scott has it right here and you two may be over analyzing. the only thing QE has really done is push $ into risk assets. business has not invested much into, well, business! instead they've been buying back stock and as scott says, getting leaner thanks largely to incredible leaps in technology. but as claims and unemployment in general get lower, business will (hopefully) invest more into growing their core rather than just trying to prop up EPS with more buyback.

of course the REASON they've been buying back so much is due to 0% rates and their idiot boards/large investors (think c icahn) who couldn't care less about long term success but rather insist on short term folly.

Joseph Constable said...

Far for it for me to understand the global imbalances. But if China’s imbalances (high savings, investment, export, and low consumption) have hurt the US (low savings, investment, export, and high consumption and debt) then rebalancing should help the US.

I do see the beginnings of re-shoring in the US.

I do hope we have only moderate growth for it is sustainable. If I could give advice to the FED I would say raise rates really really slowly.