Are We About to See an Unemployment Super-Spike?

From the looks of the initial claims series of yesterday’s unemployment claims report you would think that the worst of the explosive run-up period in unemployment is now behind us… and it may very well be…

BUT…

It’s important to recognize that after reaching its peak at the end of March, initial unemployment claims have been in a sluggish decline with the 4-week moving average still remaining 56% above the level seen last year.

Worse yet, next week’s report will very likely show a notable jump up in initial unemployment claims as we reach the second typical seasonal unemployment spike (… see the non-seasonally adjusted data below… spikes every year at mid-January and again at mid-July) for the year.

But the initial unemployment claims data is just a very sensitive, near-realtime barometer of health of the job market while the actual state of the job market is really a function of the health of firms.

As earnings season unfolds, the potential for the widespread healing of U.S. firms will either strengthen or weaken while the consensus view of a second half “recovery” either becomes more certain or, in the event of a string of disappointments, is abandoned.

In the event that a strong “V”-shaped “recovery” didn’t just fire off right on the back of this historic period of economic decline (… really an unlikely outcome in my opinion) then it’s very possible that the second half of 2009 will be very and continually disappointing.

Further, and more importantly, firms will likely need to go back for a second significant round of additional layoffs (the first round having occurred last fall through early 2009).

In this event, the initial unemployment claims should be expected to start to capture this job cutting activity in earnest in early September.

Will the second round of downsizing turn out to be as intense as the first?… it would be unusual BUT with the economic conditions so weak and unemployment already so elevated and the vicious-cycle ramifications so great, all possible outcomes still appear to be on the table.

There is the very real chance that the second half consensus realization will not just be one of disappointment but one of real uncertainty.

The stock markets could fail a re-test of the March lows… some bellweather firms could show prolonged weakness (much like homebuilders have performed since 2006… just continually weak…) … the federal government could be forced to acknowledge the charade of the bank stress tests and even engage again in bailing and stimulating…

All would equate to severe loss of confidence and where we go from there is nowhere good (click on chart to enlarge).

Comments

[Steven Hansen:]

this is a pretty negative scenario. obviously in today's economic environment, anything is possible.

i would suggest it is more likely that companies will redeploy their employee assets within the company.

however, there is a possibility that some companies will use this opportunity to reposition points of manufacture to asia where the growth is projected. most of the companies that would be doing this probably have already curtailed USA manufacturing.

Jul 10 04:16 AM

[cameroni:]

My sense tells me that the outright unemployment declines will gradually taper off but instead a whole new era of job-share, reduced hours/days and across the board wage cuts will take their place.

We are very much more likely to start to see real and sustained declines in weekly, monthly and annual incomes come into play as responsible employers hold on to valued employees but offer reduced hours in exchange for continued employment.

We should also anticipate that employment benefits packages get reduced, rolled back or eliminated as employers try to reduce costs and stay competitive.

Goodbye Perks,...Hello security.

Jul 10 04:40 AM

[User 353732:]

1. Firms do not heal well or soon when they face a continuing credit squeeze, esp small and medium businesses which are the source of most job creation and much innovation in the economy; distressed and fearful customers; a relentlessly hostile business climate created the Govt via new costs and risks; and shrinking international markets.
2. Firms do not invest in anticipation of demand when they lack confidence caused by the growing disconnect between the business reality they experience and the fabricated economic data from the Govt and the MSM
3. Firms substantially shorten their strategic horizon when they fear high inflation, dollar debasement and anticipate spiking interest rates: they focus instead on survival ,not strategic planning; on shedding liabilities and further pruning their least productive employees
4. Firms that have a substantial exposure to State and Muni customers are increasingly anxious about state and muni debt defaults, delayed and partial payments ,and payments in worthless IOUs. Such firms are facing and anticipate contending with major cash flow challenges: for them cash conservation via all means is the first priority; order backlogs from bad Govt. accounts mean nothing.

These forces will both constrain investment and further impell layoffs by many firms, greatly prolonging the economic compression and further increasing unemployment. Recovery is not in sight because profits and predictability are not in sight. No profits----no jobs; no jobs-----no recovery.
Small and medium business understand this perfectly. Our Govt either does not understand since the political bosses have never had to meet a real payroll running a real business or vaguely understand but see small and medium entrprises as obstacles to their collectivizing and controlling agenda.

Jul 10 05:49 AM

[Old Trader:]

I have to agree with cameroni when he says that, rather than another round of wholesale job cuts, companies will go in the direction of things like "job sharing", or trimming the hours worked. This will be a benefit on a couple of levels. First, its a more "humanitarian" response to crappy conditions....a somewhat "thinner" paycheck is better than unemployment insurance. Secondly, when things finally DO turn around, its more efficient to add hours to the workload of existing workers than to go through a re-hiring/retraining process for new ones.

Jul 10 08:53 AM

[John Galt:]

The scary deflationary cycle:

People lose jobs
They spend less money which hurts business
Business is hurt so they lay more people off
People still with jobs spend less worrying they WILL lose their job
Business is hurt so they lay more people off etc.
It's just a downward cycle.

Some of the things that are supposed to happen in a recession are that people eventually have old used things that need to be replaced, so they go buy new stuff, and that gets us out of a recession.

Companies are also supposed to invest in Technology which increases worker productivity of the remaining workers they have. Remember that Production is a function of Capital + Labor.

User 353 also brings up the inflationary fears that companies could have. All of this government action has people arguing deflation, inflation and hyper inflation. People don't usually do this during normal times, but all that action creates added uncertainty. Should the company conserve cash, invest, go into debt, what to do?

Jul 10 09:08 AM

[AndrewBaker:]

Regrettably there will be a lot more unemployment going forward as the economy is in a bad way. Some companies will try to share the hardship around their existing numbers with short time working, extra unpaid vacation, reductions in overtime and similar, whilst some will use the opportunity to trim staff numbers. But the outcome will be less work available overall until the real economy recovers: that means demand for goods that are manufactured as opposed to services that just shuffle things around. Consumer demand has to pick up first as the economy relies on it for 70% of total production (taking the official figure). So, when I see new jobs on offer to make something rather than ones for pushing pens, I'll be a lot happier.

Jul 10 11:29 AM

[Carlos Lam:]

On Jul 10 04:40 AM cameroni wrote:

> My sense tells me that the outright unemployment declines will gradually
> taper off but instead a whole new era of job-share, reduced hours/days
> and across the board wage cuts will take their place.

Agreed. The June BLS data showed workweek hours down to 33.0 and OT stagnant. The amount of labor (and, presumably, pay) that is occurring is thus at about 80% of its potential.

Even government isn't immune. I work for a mid-sized county, and there are 2 similar ideas floating about:

1. Decrease salaries across the board by 5%
2. All county employees take one day off each month w/o pay

Jul 10 11:54 AM

[awake09:]

"...bailing and stimulating." I thought I was reading a stock market site!

My company's upper management gave themselves raises this last quarter, and then laid off 18 people, 15% of the work force. But to make sure no one felt bad, they took the remaining employees out to lunch-- to tell them the company is up for sale.

Cheers.

Jul 10 09:24 PM

[Henry Buttal:]

As a self-employed consultant, which I would described as being marginally employed to under employed currently, I believe there is a large number of people in the invisibly unemployed class.

Often they have a working spouse and assets, so they have a cushion; and may not be on unemployment.

Jul 10 09:56 PM

[W.E. Heasley:]

The Economist had an article several years back predicting that by 2010 the US Work Force would be made up of 49% self employed or contract labor .

Assume they over estimated and that self employed and contract labor makes up 40% of the Work Force. Then the current unemployment rate is way north of 9.5%. More likely 15% or so.

Maybe your “spike theory” needs to do more investigating regarding what is happening with the self employed and contract workers. The results may reinforce your theory.

Jul 10 11:26 PM

[Sold At The...:]

User 353732,

This is SoldAtTheTop ... the blogger that wrote this post...
Can you email me at: [e-mail]


On Jul 10 05:49 AM User 353732 wrote:

> 1. Firms do not heal well or soon when they face a continuing credit
> squeeze, esp small and medium businesses which are the source of
> most job creation and much innovation in the economy; distressed
> and fearful customers; a relentlessly hostile business climate created
> the Govt via new costs and risks; and shrinking international markets.
>
> 2. Firms do not invest in anticipation of demand when they lack confidence
> caused by the growing disconnect between the business reality they
> experience and the fabricated economic data from the Govt and the
> MSM
> 3. Firms substantially shorten their strategic horizon when they
> fear high inflation, dollar debasement and anticipate spiking interest
> rates: they focus instead on survival ,not strategic planning; on
> shedding liabilities and further pruning their least productive employees
>
> 4. Firms that have a substantial exposure to State and Muni customers
> are increasingly anxious about state and muni debt defaults, delayed
> and partial payments ,and payments in worthless IOUs. Such firms
> are facing and anticipate contending with major cash flow challenges:
> for them cash conservation via all means is the first priority; order
> backlogs from bad Govt. accounts mean nothing.
>
> These forces will both constrain investment and further impell layoffs
> by many firms, greatly prolonging the economic compression and further
> increasing unemployment. Recovery is not in sight because profits
> and predictability are not in sight. No profits----no jobs; no jobs-----no
> recovery.
> Small and medium business understand this perfectly. Our Govt either
> does not understand since the political bosses have never had to
> meet a real payroll running a real business or vaguely understand
> but see small and medium entrprises as obstacles to their collectivizing
> and controlling agenda.

Jul 11 10:00 PM