Unemployment insurance claims are the single best timely indicator of the state of the economy. Although the week-to-week and even the month-to-month fluctuations can be misleading at times, if this series is trending, that's where the economy is headed.
Take a look at the picture below. I graph weekly unemployment insurance claims from 1967 through this morning's release -- 573 thousand. Claims have been trending up for a while now. Continuing claims look even worse. They are now, 4.4 million, only 6 percent below their all time weekly record set in November 1982. That's almost within the sampling error of the series.
We might be inclined to discount this week's number a bit. We already knew the labor market was bad. Plus, the weeks between Christmas and Thanksgiving have always been hard to seasonally adjust, what with Thanksgiving moving around every year. But, whether or not this week's number is real, the trend is solidly up and it is nothing but bad.
The job market is deteriorating. How bad is going to be?
Let's take a look at the relationship between initial claims and the monthly change in employment. We have a consistent series for each going back to 1948. The relationship between the two series is one of the most stable relationships in macroeconomics. It survives recessions, booms, the 1970s, and even the Great Moderation. If anything at all, the month-to-month movement has gotten stronger over the last twenty years.
Take a look at the chart below. The relationship holds up all the way back.
Now comes the scary part. My model claims-based model of employment spits out a December fall of 933,900!! That's within spitting distance of a million. It looks like we are in for a bad couple of months. Hold on to your hats.Caveats. Of course, the 933,900 number comes from holding initial claims in the first week of the month constant for the rest of December. The risks to the forecast go both ways here. It would also be a monthly fall 30 percent larger than any other fall in U.S. history. That in itself argues against the number. In percentage terms, however, the number is not all that big. The labor force has grown a lot since 1974; we may have room for a large fall.
We shall see. But, it looks like a lot of folks are going to have a less-than-merry Christmas.
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From the past two postings on the blog, the importance of the US demographics cannot be understated.
As the boomers approach retirement, they all have the same expanded balance sheet trade on. As the workforce growth rate slows in trend (was well over 4% in the 70s now just about 1% and still headed lower) they are all looking to exit the trade and the balance sheet crunch is on. Demand pressures for balance sheet expansion have gone negative. US household sector savings are going to explode higher. 1mm drop in payrolls is a massive signal of such a transition. Its Secular.
Down 1mm in payrolls is a massive number given the workforce is not growing that rapidly. My view remains that financing the baby boomer is a horse and buggy business. Its over for those industries and a precipitous decline in housing prices in the US northeast corridor is coming.
Policy, in general, has supported prices and prices are what need to adjust lower. Modern finance balances the equation PV = CashFlow / TermStructure.
PV's simply need to fall relative to much lower cashflow (cashflow has collapsed is the problem) in the system. As the Fed just reported in the Z1 release, the household sector is now paying down debt.
The reversal in cashflow is almost 1.7 trillion USD from its peak (when in trend) roughly 2 years ago in the US household sector alone. The trend rise in private sector credit has hit a secular peak.
Industries dependant on household sector credit growth are impaired for years. Furthermore, as the US government takes on explicit debt increases, it does so with a naturally weakening tax base. The workforce growth rate is slowing perhaps to zero or negative in the coming years.
The solution to the economic crisis lies partially in the TermStructure. Only soveriegn bonds, as an asset class, have increased in price this year.
With deflation being a fear, yields should be allowed (soveriegn) to trade negative. This will push up the market cap of the bond market and act as a wealth counterweight to sagging asset prices.
During inflation, yields rise above expected inflation rates to provide an alternative to private sector assets. During a deflation, yields need to undershoot expected deflation. This on one hand rewards the savers but also challenges as to when to shift back into private assets.
Bond market gains are monetized by the fed reducing explicit US govt obligations but allowing QEP to progress making an important substitution for the collapsed velocity.
The risk free rate only says you will get money at the horizon, there is no natural law as to why it can't be negative. If deflation is -5%, why should govt borrow at 0%? Its getting ripped off.
The economy is having a massive downward cashflow shock. First from credit and now from income. TARP has largely supported PV. Simply throwing money away.
The Fed should push rates below zero. Push up the bond market cap. Reduce borrowing needs. Replace the collapsed velocity with market cap.
The tax base is stable in the US, ramping up liabilities in front of what will be explosive entitlement growth is a clear negative. Creating forward cashflow obligations is a disaster.
Rates down, big time negative and let the bond market do the work. Break the taboo on negative rates. Millions of people depend upon it.
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