Thursday, May 30, 2019

Initial jobless claims: still positive, but extra watchfulness justified

 - by New Deal democrat

Late last year, as initial jobless claims were rising off their September lows, I did some parsing of levels to watch for in terms of a change in the economic cycle.

Here’s the nut:
the simple fact is that there is almost always one or two periods a year where the four week moving average of jobless claims rises between 5% and 10%. About once every other year for the past 50+ years, it rises over 10%. Typically (not always!) it has risen by 15% or more over its low before a recession has begun. And a longer term moving average of initial claims YoY has, with one exception, turned higher before a recession has begun. 

A second way to parse signal from noise is to look at readings YoY.  With the sole exception of 1981, when the Fed was drastically raising rates, the number has always been higher YoY by the time a recession begin.
So let me distill some signal from the initial claims noise: 

As to the four week average:
- at an increase of 10% in the four week average from its low, take notice
- an increase of 12.5% or more is a warning sign
- an increase of 15% or more almost certainly means a recession is close at hand

As to the YoY% change averaged monthly or quarterly:
- at a decrease of -2.5% or less, take notice
- a YoY increase is a warning sign, but there are many false positives

Here’s a graph illustrating that latter point:


Now let’s turn to this week’s data. The four week moving average is 216,750, up 7.6% from its low of 201,500 in the weeks leading up to this year’s late Easter:

Although the levels are generally flat to slightly declining since February of last year, there’s no cause for concern here yet. 

The monthly YoY% change, however, is only -1.5%:

Since the beginning of this year, while remaining positive for the economy, the comparisons have been weakening - even with the 49 year lows in early April. We don’t have a warning sign at this point, but taking notice and being extra watchful is justified.