Do New Claims Below 400k = No Recession?

by: Barry Ritholtz

One of the latest wrong ideas floating around is that you cannot possibly have a recession until there are more than 400k new jobless claims per week. I do not believe that relying on New Unemployment Claims presents sufficient information to draw that conclusion. This morning, we will explore why, and what might be a better measure. (New Jobless Claims are released today at 8:30 am. Consensus is for 370K, with a range of 360K to 380.)

Similar to the erroneous claim that no recession can start when GDP is positive -- now thoroughly debunked -- the latest similarly incorrect bout of ignorance is the statement that current employment situation is non-recessionary due to initial claims being below the 400K level.

Alas, if only these analyst/pundits were more reliant on historical data.

The "Not at a recessionary-layoff-rate" crowd has forgotten why employment data is so important: Its all the good things -- consumption, savings, investment -- that goes with it. However, employment is a function of more than just layoffs. As we know, total employment is a function of both layoffs and new hires combined.

Why does this matter? Layoffs are a function of several factors, not the least of which is the number of recent hires. Given how poor the overall level of new job creation was in the post-2001 recession cycle, the present layoff level is not surprising. It is relatively modest, at least when compared with the 2001 recession.

Hence, accurately tracking this data series is important.

Consider instead Continuing Unemployment Insurance Claims [CUIC]. The informative chart below shows U.S. Continuing Unemployment Insurance Claims, year-over-year percentage changes, 4 week moving average (shown in light blue).

The continuing claims data series captures two key elements:

1) The number of layoffs/job losses;

2) How quickly the unemployed return to work.

Hence, layoffs are only half of the picture.

The chart below depicts both factors: The layoff rate combined with level of labor returning to employment. So even if layoffs are relatively modest, continuing claims level could deteriorate, if hiring is weak.

Observe the CUIC, YoY, 4 Week MA: Every time this has moved above 10%, we have been in a recession. If you want a margin of safety, use 15%.

The current reading: 19.5% -- is deep into recessionary levels -- despite INITIAL CLAIMS being below 400k.

Continuing unemployment claims confirm recession?
click for ginormous chart

data via BLS, NBER

At present, we see the ongoing deterioration of continuing claims. This is occurring regardless of the rate at which employers are laying off workers. Hence, it is more a factor of new hiring as opposed to layoffs.

The chart above lends support to the idea we've very likely entered a recession already.


One final note: Continuing Unemployment Insurance Claims are a much cleaner data series than NFP. There is no Birth/Death model, no hedonic adjustment for quality -- and, the Year over Year data does not suffer the occasional indignity of seasonal adjustments.

Enjoy it before someone dilutes it to the point of worthlessness. . .

Job Creation: Post-Recession Recovery Cycles

Recessions Often Begin With Positive GDP Data

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