Mass Layoff Events Accelerating 12 comments
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The Bureau Of Labor Statistics' Mass Layoff Events statistic indicates that the wholesale firing by corporations is accelerating once more after a small respite in the January to March period. The BLS defines a Mass Layoff Event as one that occurs when an establishment has at least 50 initial unemployment compensation claims filed against it within a five-week period and the layoff lasts longer than 30 days. In other words, as the name implies, a mass layoff (and the reason for EPS to be sterling when revenues continue collapsing in all those Q1 earnings calls). This goes hand in hand with initial jobless claims reports. Chart of both are provided below (click to enlarge) [link to BLS data here]. Kinda tough to spot the green shoots through the very deep parasitic undergrowth on these two charts.
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Leading indicators from the Conference Board are much more interesting: LIBOR and TED spreads are shrinking, interest rates, commodity and energy prices are increasing, the S&P500 is trending higher (above its 50 day EMA). These are much more instructive indicators for the economy's future as opposed to its past.
Here is what "The Conference Board's" most recent report (May 21) says about the economic future:
- The Conference Board LEI for the U.S. rose sharply in April, the first increase in seven months, and the strengths among its components exceeded the weaknesses for the first time in one and a half years. Stock prices, the interest rate spread, consumer expectations, initial unemployment claims, the average workweek, and supplier deliveries all contributed positively to the index this month, more than offsetting the negative contributions from real money supply and building permits. The six-month change in the index has risen to -0.6 percent (a -1.2 percent annual rate) in the period through April 2009, up from -2.4 percent (a -4.8 percent annual rate) from April to October 2008. However, the weaknesses among the components have remained widespread over the past six-month period.
- The Conference Board CEI (Coincident) for the U.S. fell again in April, driven by continued declines in employment and industrial production. The index decreased 3.5 percent (about a -6.9 percent annual rate) between October 2008 and April 2009, faster than the decline of 1.8 percent (a -3.5 percent annual rate) for the previous six months. In April, the lagging economic index for the U.S. fell more than the coincident economic index, and the coincident-to-lagging ratio rose, as a result. Meanwhile, real GDP contracted at a 6.1 percent annual rate in the first quarter of 2009, following a decline of 6.3 percent annual rate in the fourth quarter of 2008.
- The Conference Board LEI for the U.S. has been generally falling since the middle of 2007, but the pace of its decline has slowed substantially in recent months. With this month's sharp and widespread increase, the six-month decline in the index is at its slowest since the fourth quarter of 2007. Meanwhile, The Conference Board CEI for the U.S. continues to be on a downward trend that began in late 2007, and its decrease in recent months remains sharp. Taken together, the behavior of the composite economic indexes suggests that the contraction in economic activity will continue in the near term, but will likely become less severe in upcoming months.
www.littleradio.com/en.../
> It is understood by many that unemployment (aka layoffs) is a Lagging
> indicator (though the LEI counts new "claims" as a leading indicator).
> There is no predictive value to the charts you show in respect to
> the future of the economy (green shoots as you say).
Brian McM,
Your comment brings to the foreground an important issue: When is a rule-of-thumb correct?
As you note: "It is understood by many that unemployment (aka layoffs) is a Lagging indicator". Recall that, not so long ago, it was also 'understood by many' that home prices and the stock market were going to continue to rise - in fact, those who said otherwise were often ridiculed. Unfortunately, it is not uncommon for widely-held views to be incorrect - even long-standing, cherished and stoutly-defended views.
The idea that unemployment is always a lagging indicator was challenged recently in a thoughtful analysis by Bridgewater Associates. ( bwater.com ) The analysis was discussed at several websites in the econo-blogosphere.
Here's John Mauldin regarding the subject:
======================
www.ritholtz.com/blog/.../
...
Is Unemployment a Lagging or a Leading Indicator?
...
The typical pundit keeps telling us unemployment is a lagging indicator, and that the recovery will be well under way before it shows up in the job numbers. Therefore, you should buy what they are selling, because the recovery is on its way. But that may not be the case this time. One of my favorite reads, when I get to see it, is the economic analysis from Bridgewater. They are among the best thinkers anywhere, and everyone who follows them gives them a great deal of credence. This is what they wrote about unemployment being a lagging indicator last month:
“Normally, labor markets lag the economy because incremental spending transactions are financed via debt, stimulated by interest rate cuts. But as long as credit remains frozen, spending will require income, and income comes from jobs. And debt service payments are made out of income. Therefore, in a deleveraging environment job growth becomes an important leading, causal indicator of demand and other economic conditions.
“… The bounce in the economy and the stabilization in markets reflect government actions that are big enough to impact near-term growth rates, but are not sufficiently directed at the root problem of excessive indebtedness to produce permanent healing. The deterioration in employment markets will continue because companies’ profit margins are so deeply damaged that a little bounce in growth won’t do much to alter their need to cut costs. This deterioration in labor markets will undermine demand and continue to pressure loan losses, which will keep the pressure on the banks and elevate the cost of capital for tentative borrowers, inhibiting credit expansion.”
This again illustrates the problem of using past performance to project future results. You have to look at the underlying conditions in order to get a real comparison, and we have not seen a deleveraging recession in the US for 80 years. Using the past data in today’s world is statistical masturbation: it may make you feel good, but it is not producing anything really useful, and may be harmful to your portfolio.
======================
I confess to being an admirer of both Zero Hedge and John Mauldin, and I find this line of reasoning sound, for it does seem to me that we are in an economic period that is significantly different from a 'normal' recession. Thus, it may well be that unemployment has changed from a lagging to a leading indicator in this economic cycle.
The answer to the question: "When is a rule-of-thumb correct?", is the tautology: "It is correct unless it is not correct."
A rule-of-thumb is, after all, only a guide. Ubu.
On the plus side though, the falling dollar will give boost to export markets which should generate some economic stimulus of it's own. The US is still the worlds largest manufacturer and kick-starting some sluggish sectors requires a currency devaluation. There is a silver lining in bad news some times. We are just not competitive enough yet but it is coming.
When something of a consensus arises amongst business managers of a persistently low dollar versus that of our major trading partners the obvious opportunity will lead to renewed investment in manufacturing investments. Ideally it will be in sectors where we are leading like aerospace and new technologies. Military production should also rise strongly.
My concern is that the threat of rising interest rates could nip a recovery in the bud and bring on a full scale depression. Too many consumers and homeowners are already in the trenches fighting an uphill battle. Even a modest interest rate spike would be devastating to debt holders driving renewed bankruptcy filings, increasing unemployment and placing a further burden on already stressed and weakened business's.
Cam
The level of unemployment is an integral of the job loss rate minus the hiring rate over time. Hiring clearly lags an economic recovery; nobody hires until conditions demand it. So the hiring rate is a function of time with a lag. You definitely want to factor this out because lagging data isn't going to inform your investment decisions in a useful way. This means don't look at total unemployment numbers for evidence of green shoots or the end of a recession. They will still be going up after the recession ends.
Job loss rate however is either a leading or neutral indicator that reflects current or anticipated economic activity. It would be interesting to do a time series analysis to determine exactly how much of a leading indicator it is, but I haven't seen this done. Probably some economics thesis or dissertation has tried it though.
So Tyler has it right (yea Tyler) to look at layoff rates. The problem of course is that over a short period of time they can have a lot of noise. So take this article as an alert and maybe look for confirmation next month.
Because job losses are not a trailing factor may be able to detect the start of a recession by also looking for increases in total unemployment, but job loss rates will be a more sensitive indicator - with the caveat that they are noisy.
As long as the bureau of statistics keeps changing their methodology we can debate apples being oranges until the cows come home and not get to any real answers. Personally, I still figure it's still a lagging indicator. And I don't believe rising commodities mean a recovery. It could just mean a weak dollar.
And when comparing unemployment we should compare it to total the working population. Thus if 5% of the people are unemployed and the claims drop correspondingly then we aren't really seeing a deceleration in claims relative to the number of people employed so I wouldn't call that a rebound.
So far, I can't fully believe that the unemployment numbers are pointing to permanent deceleration asides from the fact there are fewer people working so it's harder to keep laying off people in the same numbers.
On May 23 10:52 PM LilBob wrote:
> It's important to remember in discussion of layoffs that mass layoff
> events in the April and May period were largely the result of bad
> news that's already happened: GM and Chrysler filing for bankruptcy
> protection. It's not as if there's some great wave of as yet unknown
> bad news out there. The scaling back of brands, temporary production
> cuts and the effects on GM and Chrysler suppliers are already well
> known and documented. Even though the mass layoff events indicators
> do represent unfortunate news, lagging indicator or not, the April
> and May figures likely represent a cresting of recent layoff activity.
Add a few other groups:
- those re-employed at lower salaries
- those getting their benefits cut as employers try to cut costs
- those getting no salary increases this year
All this has a negative psychological effects all this has on anyone not affected and a real effect on those directly affected. These effects will depress consumer confidence & spending.
On a side note, some businesses have not laid off as many people because they expect ("hope" or "wish" is probably a better term) the economy to recover later this year. Once everyone realizes our recovery will be "L" shaped versus "V" shaped - what will those companies do?
What is occurring in America is not an intellectual exercise. It is not a debate that we will all look back on and giggle at how silly our postulations were. The United States is involved in a financial and ideological life or death struggle of its own making. The right hates the left and the left hates the right and economic class warfare and racism flourishes stupidly.
The EARNING POWER of the average American is strangling. Because of that strangulation, the breath of America is fading and the nation's pulse is weakening. The Anglo-Saxon WASP penchant for pointing fingers and finding blame is being rationalized by side-stepping language into "finding cause" so that we may act! In the meantime we waste precious time in treating the patient!
The United States has SERIOUS criminal problems in the business world that must be addressed if we are to revive the patient. The greed, negative ethics and lack of morality diseases have gotten into our financial bloodstream and triage by committee consensus will take too long; the patient WILL die. These diseases need to be rooted out and destroyed! Or are YOU a cell in that disease?
Americans MUST stanch the bleeding of jobs overseas! Americans MUST kill professional lobbyism! American executive management, boards of directors and CEOs MUST remember that THEY TOO are citizens of the United States of America, NOT of BoA or WF or GE or GM or GS or MS! Americans MUST get OVER a global economy and focus on the needs of the people who are the greatest production machine on the planet! Those who are at the top fastidiously ignore the fact that when a foundation collapses, so does the house of cards on top of it.
Face it, in spite of the best efforts of the smartest people, foreclosures are about to enter a ressurgence that will pale the last round. The market is going to nosedive yet again. The dollar is going to become a wispy apparition of its former self. Jobs loss and degradation are going to be so negative that today will look like the good 'ol days!
The jobs losses that will occur with GM and Chrysler are going to be a hit for sure but the butterfly effect that will follow will be MUCH worse! Jeff Immelt hinted that GE is going to be forced to ship itself overseas to remain competitive. This is a company that has a HUGE American footprint! If GE is talking about it, you can statistically analyze it until you're blue in the face and still not understand that they'll only be the top snowflake on the tip of the iceberg!
Take a drive through your town on Saturday afternoon. I'll bet that you'll notice the eerie quiet. I'll bet you'll notice the thinning in the car lots (if they have any at all). I'll bet that it will seem more like a Sunday at 10AM. The quiet that you'll notice will be the inability of your fellow Americans to drive their own economy. The quiet that you'll notice will be your fellow citizens NOT being dynamic and industrious. It will, instead, be a display of "survival mode", hoarding, conserving, doing less for the sake of "stretching it a bit".
I have read some rather impressive grasps of reality here and I have read some fanciful, immature notions. What I HAVEN'T read is any sign of decision. As a lifelong manager I know that NO decision IS a decision to not MAKE a decision. The result of allowing the United States to flounder and bleed to death will be just that and the patient will die.
Americans need your smart help. Help them.
The silent, but extremely deadly, closure of thousands of small businesses will not be reported by any "expert" but will still devastate large swaths of the economy.
Not to mention that those lost jobs & dreams are the lost incomes of GM & Chrysler's BEST customers (left).
GM will become a Chinese company with a front left here. Chrysler is done for.
Millions of Americans will never recover. and these Americans are all of our customers too.
On May 23 10:52 PM LilBob wrote:
> It's important to remember in discussion of layoffs that mass layoff
> events in the April and May period were largely the result of bad
> news that's already happened: GM and Chrysler filing for bankruptcy
> protection. It's not as if there's some great wave of as yet unknown
> bad news out there. The scaling back of brands, temporary production
> cuts and the effects on GM and Chrysler suppliers are already well
> known and documented. Even though the mass layoff events indicators
> do represent unfortunate news, lagging indicator or not, the April
> and May figures likely represent a cresting of recent layoff activity.