In the near term, the roughly 48,000 UAW workers on strike at General Motors have likely inflated the number of those filing claims. As the strike rolls into its fourth week, we expect a further increase.
Signals implying the slow demise of the decade-long economic recovery include the rising number of claims for unemployment insurance benefits. While we do not believe there is imminent risk of an explosion in demand for first-time benefits, once the pace of firings rises above 250,000 it likely marks an important turning point late in the business cycle.
In the near term, the roughly 48,000 UAW workers on strike at General Motors have likely inflated the number of those filing claims. As the strike rolls into its fourth week, we expect a further increase. Although striking auto workers do not file claims, given the breakdown in talks, this will probably change in coming weeks. Forward looking investors should also understand that with the work stoppage moving through the BLS reference week of Oct. 12, the striking workers will adversely impact the U.S. October employment report.
Meanwhile, slowing growth in the final quarter of the year will not only cause overall hiring to slow, but will be another factor driving first time unemployment claims higher. As the figure below illustrates, a decrease in economic activity generally corresponds to an increase in claims for unemployment insurance benefits (referred to as jobless claims). As real GDP growth begins to slow, employment opportunities should begin to shrink, causing initial jobless claims to rise.
The increasing pattern of rate of change in jobless claims since 2017 now looks to have presaged the moderation of growth in 2019. The growth spurt was most likely transitory, due to the 2017-2018 tax-cut stimulus that failed to meet expectations for investment and manufacturing growth.
The figure below shows the level of jobless claims skyrocketing during the Great Recession of 2007-09 and then decreasing on trend from 2010 until 2016. In the last two and a half years, however, the trend in the level of claims appears to have flattened even as economic growth continued to increase.
We can gauge extent of that deterioration by comparing the actual level of weekly claims series to its short-term and medium-term moving averages (see the figure below).
A month after the end-of-summer employment, the level of initial claims in the last week of September 2019 was 219,000, the third week in a row that the level of claims has been above its 13-week moving average. A sustained increase in claims above its medium-term 52-week moving average of 218,000 would be needed to confirm a change in direction. [Note that the use of a double cross-over confirmation will generally account for changes in direction, but might not be sufficient for the distortion in the series from one-off events such as the backlog of claims after Hurricanes Irma and Maria.]
Recall that we are looking at a weekly, high-frequency series that we expect to be somewhat volatile, and that three weeks of increases are not enough to make a robust judgment. But weekly initial claims have increased in 30 of the past 53 weeks, or 57% of the time beginning October 2018. Compare that to 70 of the 97 weeks — or only 36% of the time — during the economic recovery from January 2015 through September 2018, and one could argue that a warning of a potential economic slowdown has been issued.
Figure 3 – Claims Weekly.xlsx / Tab = 2006