Over the next few weeks, policymakers will receive high frequency data that will capture supply and demand shocks that are going to cascade throughout the economy. The most important is the initial jobless claims data that will most likely reflect job losses in trade and transportation – disruptions that we are hearing about from our clients and contacts around major ports. Our model implies that first-time jobless claims need to climb to the five-year average of 242,300 to indicate a serious probability of an end to the business cycle.
Initial jobless claims data will most likely reflect job losses in trade and transportation.
Since the 1980s, once the level of monthly initial employment claims rises above its five-year average or rises above the average level of claims during non-recession periods, the economy has tended to fall into recession, and initial claims for unemployment benefit rises dramatically.
The weekly and monthly releases of unemployment data will most likely provide the next round of data that will give us an idea about the impact of the coronavirus outbreak. As the figure below shows, initial claims for unemployment benefits tend to fall during economic recoveries and then rise sharply when demand wanes and employers begin to shed employees. Should claims begin to rise sharply on the back of what is going to be a significant supply shock across the trade, housing, autos and aerospace sectors, investors and policymakers will get a near real-time early warning of a greater-than-anticipated slowdown.
Initial jobless claims are currently just above 200,000 and approaching the series low of 1968. With the average level of claims so far below the average, it seemed safe to say that the economy was not at risk of falling into a recession.
The low level of jobless claims also appears to confirm the recession signals from a model devised by Claudia Sahm of the Federal Reserve Bank of St. Louis, which is available on the FRED Economic Database. The “Sahm Recession Indicator signals the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to its low during the previous 12 months.”
With the labor market still extremely tight, the model is signaling an unlikely chance of a recession. But the large supply shock from the external sector will most likely cause first-time initial claims to rise in the near term. That leads to a question: Will that shock cause an increase in the unemployment rate consistent with a recession?
January’s headline unemployment rate ticked up to 3.6% from 3.5% in December, which is the 12-month low. That means that it would take an increase in unemployment to 4.0% for the model to signal an economic recession.
Until the outbreak of the coronavirus, it didn’t seem feasible to expect that to happen anytime soon. Thursday’s release of the claims data and Friday’s release of the unemployment rate might offer initial clues. But it may be two to five weeks before investors are able to ascertain the risk of a recession caused by the coming supply shock to the economy.
Median expectations are for 215,000 initial claims in the latest week and a 3.6% unemployment rate in February, though it’s unclear if the health crisis will have had a significant effect.
One might also assume that employers would be reluctant to shed employees at this point. Were the crisis to continue, though, you would expect the impact of a slowdown in sales to affect small and medium-sized businesses first, as payrolls outstrip sales, particularly in enterprises where labor costs are the highest cost of business.