Continuing Unemployment Insurance Claims Say “Recession”


"Below 400k New Claims = No Recession."

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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.

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Continuing unemployment claims confirm recession?
click for ginormous chartCuic_2
data via BLS, NBER

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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.

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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 . . .

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Previously:
Job Creation: Post-Recession Recovery Cycles
http://bigpicture.typepad.com/comments/2008/04/job-creation-po.html

Recessions Often Begin With Positive GDP Data
http://bigpicture.typepad.com/comments/2008/05/positive-gdp-re.html

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What's been said:

Discussions found on the web:
  1. Helene commented on May 22

    Ya know, there’s something else Barry that no one talks about:

    When you get a severance package you are not entitled to unemployment.

    Now, while not all that many people get severance these days, many of those in the biggest layoff area — Banks, Brokers, Financials — often do.

    These people do not show up in either the New Unemployment Claims or Continuing Claims either.

    Most of the layoffs coming from financial companies are likely giving some sort of severance pkg that is bigger than 2 weeks pay.

    Just an FYI — the new claims are likely understated due to this.

  2. Steve Barry commented on May 22

    I’m in the no recession camp…what this is will be worse. It may even require a new name…how about “non-linear economy” to soften it up…or the real truth – “smoldering crater”?

    Hilarious that Dick Bove has just now downgraded Merrill Lehman and Goldman to SELL. He had CNBC believing it was time to look at financials.

  3. 12th Percentile commented on May 22

    I find this whole “it isn’t a recession because…” mindset an excellent investment opportunity. People who can’t interpret data themselves but need someone else to reduce the analysis to one word are the type of people who aren’t that bright and will help me make a nice return on my money in the next year by waiting to be told what to do.

  4. Vermont Trader commented on May 22

    The money quote from the FOMC minutes yesterday….

    “Economic activity was anticipated to be weakest over the next few months, with many participants judging that real GDP was likely to contract slightly in the first half of 2008.”

    So the Fed says that GDP will likely contract, that’s a reccession, case closed,

    I’m moving on to “how bad?”

  5. Ken H. commented on May 22

    12th, exactly right. These arbitrary barriers are amusing but maybe it’s because I run a business and invest for fun.

    Half of Americans still make less than 30,0000. 2/3rds less than 50,000. The purchasing power of these Americans is being reduced by as much as 20% by my calculations by the increases in food and energy. These increases are lining the pockets of less than 1% and probably being used to cover CDO losses. Of no real use to GDP or the American economy. If these people spend on energy and food instead of my business, I don’t make money. I don’t make money, I can’t make payroll or increase capital spending. Simple really.

    I don’t care what you call it, but it’s not good. Many are starting to look as bad a David Lie-rah a couple of years ago. This down turn is starting to look like it is going to be extremely nasty and difficult. It seems to me that this is the period where those in the know fleece those unsure for their last dime. Recession or not!

  6. 12th Percentile commented on May 22

    “i don’t care what you call it, but it’s not good”

    Apparently you have been looking at the actual data.

    Other than for the top 1% there is NO good news that I know of in the business world as a whole. And the consumer is finally tapped out. Yesterday I saw a report that 25% of people ages 45-65 were borrowing against their 401Ks. And this whole downturn is just getting started. MEW is over. Credit card defaults are ramping up. And CRE is just starting to crash. And then we have all the resets coming in the next two years on the option arms. Plus the $135 dollar oil has yet to work its way through the whole system. Apparently, the FED can save the banks by bailing them out. However, the consumers will take us all down with them. And we are still fighting two wars. Those ain’t cheap.

    I’m impressed with how long they have been able to hold up the house of cards. Perhaps they can do it until November.

  7. Michael M commented on May 22

    Since everybody wants to put their name on what’s ahead, let me give it a shot as well: If we face peak oil and food shortages coupled with a depression and deflation should it then be named The Great Depletion…

    or should that name be reserved for the period before when most of the actual depleting took place?

  8. Steve Barry commented on May 22

    Has Warren Buffett jumped the shark with all these annoucements and CNBC appearances? Should’nt he be working behind the scenes? Bill Gates has rubbed off on him.

  9. Hal commented on May 22

    one of the above posts discusses earnings levels and costs of energy and food.

    obviously, if you compare someone earning 50k with someone esrning 500k-they have two different “price inflation ” rates when the lower income one spends a disproportionate more on energy and food–eg-necessities.

    on the jobless claims–that data is likely messed up too under the garbage in garbage out theory of not something more sinister.

    on another front, my kid just graduated and is jobless (grad school) and cannot file for comp–how many out there like that?

    the only “good” data we see has been massaged so much that its meant for the clueless-of course, most of the population is clueless anyway.

  10. Jim Haygood commented on May 22

    EXCELLENT chart!

    Helene (1st comment) is right — not only do those who take severance packages not get unemployment benefits, but also many more people are working as consultants, independent contractors, one-person shops, etc. They don’t show up in unemployment claims either.

    Fortunately, the CUIC chart partly gets round the incomplete raw data by using the YoY rate of change. Parenthetically, Rick Santelli at CNBC has been harping on the CUIC number for weeks, which reinforces my view that he’s miles ahead of any of the other incumbent talking faces on Bubble Vision.

    Note well that the 4-week MA (the dark blue line in the chart) did not start dropping sharply until a year after the 1990-1991 recession (marked by a vertical gray bar) allegedly ended. And after the 2001 recession, it took a year and a half before the CUIC finally plunged in mid-2003.

    My point? Throughout 1991 and 1992 there were complaints about a subnormal, “jobless recovery.” The chart shows why. And in the most recent event, the S&P anomalously did not bottom until Oct. 2002, nearly a year after the recession allegedly ended. The CUIC chart shows that in terms of continuing claims, the recession did not really end until Sep. 2003 — a recovery which was foreshadowed in standard fashion (and with typical lead time) when stocks turned up decisively after March 2003.

    Why is the NBER getting the recession dates wrong? The main reason is systematically understated inflation statistics. If inflation were properly estimated, GDP would have been at least a percentage point lower in every quarter, lengthening the no-growth and slow-growth periods. A secondary reason is that it’s politically expedient to shoo the red-headed stepchild of recession out the door at the earliest plausible moment.

  11. judyo commented on May 22

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

    Or unemployed!

  12. larrybob commented on May 22

    BR may want to help out his friend Larry Kudlow. LK posted over at The Corner this wonderful example of his intelligence:

    “This idea of rewarding work instead of wealth is just insane.”

    LK certainly has a way with words…

  13. bluestatedon commented on May 22

    It’s hard to know who’s more clueless — the “journalists” accepting the drop at face value, or the investors who are allegedly buying the same claptrap. Needless to say, neither group of seasoned professionals would know what a CUIC chart is if it sat in their laps and called them mama.

    “NEW YORK (Reuters) – Stocks rose on Thursday after a surprise drop in jobless claims…”

  14. John Borchers commented on May 22

    Keep all eyes on the deflation ball.

    I’m using AA XOM and FCX.

  15. VennData commented on May 22

    Posts like these, which countermand the bull case, are simply ’emboldening’ the bears.

  16. Barry Ritholtz commented on May 22

    Understanding reality is important to both the Bulls AND the Bears

  17. Our man in Helsinki commented on May 22

    What’s remarkable whith this chart, is the fact, that since 1969 everytime the YoY % Change rose over 10 %, a recession soon followed. Now it’s 19,5 %.

  18. michael schumacher commented on May 22

    Steve-

    they have one more try at 13k…….wait for it then bombs away….

    Ciao
    MS

  19. KnotRP commented on May 22

    Hey BR – are those “missed” points really just unemployment benefits running out due to extra long recessions that exhaust continuing benefits?

  20. me commented on May 22

    Great chart BR. I think Jim Haygood hit on one of my hot buttons. How many are covered by unemployment anymore. Another on to add to the mix is the part timers. Many are having their hours cut back and in many states part timers don’t receive unemployment.

  21. Francois commented on May 22

    “This idea of rewarding work instead of wealth is just insane.”

    How the hell is wealth created?
    –By a godly vortex coming from Hogwarts?
    –Because some of us shall be The Chosen Ones?
    –Because some are sooooo smart that wealth cannot pass them by?

    It’s the work, stupid!

    LK is the insane one. You love America Larry; then, why do you hate Americans so much? Do you have a conscience? Are you familiar with the word “decency”?

    That a walking mistake of Nature can have his own TV show is the prime example of something going really wrong in this country.

  22. NJandrew commented on May 22

    Another issue is people who get hours cut. For the past few months I have only been working 20-30hrs. The pay I get from this part-time work puts me over the max for unemployment but the lost pay sure makes a difference in my habits. Cut down on eating out, take-out, discretionary purchases, etc.

    Two others at my company are in the same situation, cut it hours (and take home pay) but we don’t show up on the unemployment numbers.

    Andrew

  23. Alfred commented on May 22

    This is a good point, but it is one of many. If you look at the State Coincidence Indicator (Barry’s post above) than you will see that the diffusion index is still positive and therefore indicates that we are not in a recession yet. You can draw a similar chart to Barry’s and come up with a total different result.

    It really is not important if some time from now we look back and learn that the first quarter was negative. What is important is how this slowdown will shape out in the coming quarters, and I would challenge everyone who prognosticates an outcome from one correlation, albeit a very interesting one.

    A detailed look at CUIC reveals that the 4WkMA bottomed at about 2.5 mln claims. In the prior cycle this bottom was much lower at about 2 mln claims. Maybe this should be taken into consideration as well.

  24. cm commented on May 22

    Helene: In California, receiving severance will not disqualify you from unemployment benefits, at least when your employment is terminated. Link

    The situation may be different if the person is still technically an employee (given notice and removed from the workplace, but on salary continuation), which sometimes happens to satisfy provisions of the WARN act.

    The situation may also be different if the termination is not technically involuntary, but the employee was convinced, or chose, to “resign”, e.g. in an attempt to avoid the blemish of a dismissal upon a future employment verification (of course from the employer’s side the motivation is to reduce their dismissal statistics and related unemployment insurance penalties, as well as to attempt to discourage wrongful termination lawsuits).

    Not legal advice.

  25. Canada life insurance commented on May 25

    Interesting numbers, however, I think all similar quantifications work, until they are broken by some simple exception. I heard that in Europe there is sometimes used number of newly registered cars as a good way how to predict recession or growth (or is it used also here?). But actually, economy is much more complicated to be predictable by such single measures… Anyway, I am working as Toronto life insurance broker and here everybody, who has something to do with finance, believes recession already started in US…
    Lorne

  26. Mythiot commented on May 25

    Barry, the plot in the PDF linked below shows the trailing-three-months (T3M) year-over-year (YoY) rate-of-change (RoC) for non-farm employment, IUIC and CUIC.

    To better show the relationship between the three variables, they have been plotted as percentages of their ranges, and IUIC and CUIC are inverted. IUIC and CUIC are monthly averages of the weekly “not seasonally adjusted” (NSA) values, rather than the usual four-month moving average of the seasonally adjusted values.

    As expected, we see that IUIC leads CUIC and CUIC leads NFP. What is somewhat shocking, though, is the trend since the beginning of the year, with IUIC and CUIC in (inverted) freefall. No doubt that NFP is in the process of doing the same.

    http://www.mediafire.com/?wxva5mmyzzj

  27. jagmohan swain commented on May 26

    Continuing claims of course doesn’t look good and painting a recession or slowdown.But it’s possible that initial claims are below 400000
    because as I have mentioned before there is simply not much scope for lay offs at the current rate of production.The reason, there is a freeze in hiring and hence you have a high continuing claims, is because of the sentiment being so widely negative among business managers and consumers.

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