Don't be misled by yesterday's super-strong jobless claims report. The labor market is slowing along with the rest of the economy.
Everyone was shocked when new weekly claims for unemployment benefits came in at just 190,000 yesterday. Figures that low are extremely unusual. We've rarely ever dropped below 200,000 per week on a sustained basis. In fact, claims rarely ever fell below 300,000 per week during the entire expansion from 2001 through 2007! Same for the 1990s, by the way.
But the seasonally adjusted data is a little quirky right now because of Covid. If you look at the non-seasonally adjusted, raw data, claims have actually been on a general uptrend since around last October, defying the typical pattern of holiday strength. The real question as we move into February and the seasonals smooth out, is whether we'll start to see more of an uptick.
And we know layoffs have been picking up, because they're all over the news lately. Yesterday it was Microsoft cutting 10,000 workers; today it's Google parent Alphabet cutting 12,000 jobs. "We are seeing 5%-10% headcount cuts across the tech sector as many of these companies were spending like 1980s Rock Stars and now need to reign in the expense controls ahead of a softer macro," wrote Dan Ives of Wedbush yesterday.
Do these seem like the type of people heading to immediately file for jobless benefits? I highly doubt it. So the cuts we've seen in tech are unlikely to show up right away in the weekly claims figures, which again means this series is understating the current loss of momentum in the labor market.
Where we are already seeing a clear slowdown is in the monthly U.S. jobs report. Job gains have slowed from a breakneck pace of half a million per month a year ago to half that pace in the past six months. Temp jobs--a leading labor market indicator--have fallen by 111,000 since July. Job growth in professional and business services has already turned negative, shedding a net 6,000 jobs last month.
Little wonder wage growth is already moderating. Let's not forget it came in softer than expected last month, as high-paying areas of the economy like tech and finance are experiencing high layoffs and seem to be in their own recession already.
As for other leading indicators of the labor market, the ISM manufacturing survey's employment index slipped into contraction in November before recovering somewhat last month "likely due to the holiday period." The ISM services--covering much more of the economy--employment gauge dropped into contraction in December, as the headline index slumped a surprising six points last month.
This all suggests to me that jobless claims are likely to worsen soon, and once they do, the recession ship has pretty much sailed. Claims were only a clear uptrend for about eight weeks prior to the start of the last recession in December 2007. During the last two downturns, in fact, they hit their highest level right around the time the recession was already over.
So we call them a leading indicator, but they don't really offer a whole lot of lead time, especially given the glacial pace at which policymakers move. If the Fed were truly going to keep us from recession--and I'm not sure that's even their goal--they'd have to start taking action now. If they wait for the labor market to roll over, it will be way, way too late.
See you on Monday!
Kelly
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