Jobless claims still not pointing to imminent double dip recession
I tend to put a lot of stock in jobless claims as a coincident (real-time) indicator of the economic scene. My reasoning here is fairly simple. Household spending makes up 70% of the economy. Households are dependent on labour wages for the lion’s share of their disposable income. Absent changes in debt levels, one should expect changes in output (which is what the GDP measure we care about is) to mirror changes in consumer spending derived largely from labour income.
So, naturally, if fewer people are losing their jobs and filing for unemployment compensation, labour income is likely to increase. If more people are filing jobless claims, disposable income is likely to move lower. The key here is that we are looking at a first derivative statistic i.e the change in GDP as determined largely by the change in disposable income.
Now, there are a number of caveats to this:
- The government can boost disposable income via tax cuts or diminish it via tax increases.
- Households can lever up and boost their spending or they can delever.
- When interest rates are rising, interest income is too. When rates are falling, so is interest income.
My rule of thumb has been that an increase of more than 50,000 in initial jobless claims presages recession. A decrease in jobless claims presages recovery. (I use year-on-year or six-month changes in the 4-week average data.) The data supporting this rule of thumb are fairly good in the 43 years since the Department of Labor in the US started reporting weekly claims. I first pointed this out in 2008, saying that jobless claims had been a perfect recession indicator i.e. no false positives and never a miss. See Another Perfect Recession Indicator for more on this.
Last year, I also relied on jobless claims as one indicator telling me the economy was nearing recovery. See Revisiting employment indicators for signs of recovery from last August which is about the time I believe the technical recovery began.
So where are we now?
The chart above says we are not near a double dip recession. I happen to think there is a 50-60% we will suffer a double dip in 2011. Nevertheless, the data here are saying any recession will not be caused because of lost jobs. For comparable periods, look at the numbers around 1977, 1985 and 1996. (Note: the shaded regions represent recessions. See What is a double dip recession? for Bob Shiller’s alternative definition of one).
I am not looking at this data point in isolation. Other data point to problems, consumer spending first among them. If we do suffer a recession now, it will be because of deleveraging by consumers. Consumer credit is still contracting now, even though GDP has turned higher. Although this is positive as consumers are over-leveraged, it is also an example of the paradox of thrift that is going to be a drag on the economy.
Nevertheless, the trend in the year-on-year change in jobless claims is not good. Unless we create more jobs, the combination of stagnant before-tax income and deleveraging (and maybe even tax increases) will likely mean double dip in 2011 in my opinion. At a minimum, the economy will be operating well below potential.
Clearly, we all hope this can be avoided but policy decisions determining if it will have already been made. Policy now in the pipeline will be too late to have an appreciable effect.