No one should be surprised by Thursday morning's discouraging news on weekly jobless claims, which surged to 407,000 last week. This is the highest they have been since the anomalous but temporary spike in September 2005 directly after Hurricane Katrina. The warning signs have been bubbling for months, as we, and others have pointed out. And so, this time, the rise in new filings for unemployment insurance is a reflection of a weak economy rather than a one-time weather event. In short, there will be no sudden and sharp drop in new claims this time, as there was in 2005.
As our chart below reminds, the rise in jobless claims has been unfolding since late last year. The message in the graph is clearly that the tide has shifted in no uncertain terms. No one can say that jobless claims are still in a range that reflects a healthy economy. Those days are over. The front line of optimism now turns to looking for light at the end of the tunnel. As we discussed last Friday, the recession is here and the debate necessarily moves to the questions: how long, how deep?
Fed Chairman Bernanke set the official tone on Wednesday, when he said "recession is possible" in testimony on Capitol Hill. By this editor's reckoning, Bernanke was being charitable. As the above chart suggests, the odds of sidestepping economic contraction look virtually nil. Yes, anything's possible. But if we look at a broad range of economic indicators in addition to Thursday's jobless claims report, it's hard to miss the obvious trend.
It'll take time to get a handle on how short and shallow (or long and deep) the recession will be. Given the lag in economic data, the coming weeks and months are likely to provide ongoing confirmation of what's already obvious. As a result, the focus turns to the various leading economic indicators for clues about where the cyclical trough lies and what will spark an eventual upturn. But let's not strain our eyes at this point; it's too early for that.
For the moment, patience and prudence, along with a modest dose of opportunistic buying sprees here and there are still a strategic-minded investor's best friends.