WHY UNEMPLOYMENT IS ABOUT TO SURGE
By Lance Roberts, CEO, StreetTalk Advisors
Unemployment is potentially set to rise sharply in the coming months. That is a pretty bold claim on the surface and one that flies in the face of both mainstream economists, and the White House which is about to unveil a new “jobs plan”.
Let’s take a quick look at some numbers: 8, 160, 400, 350, 12 and 5. There have only been 8 weeks out of last 160 weeks that unemployment claims have been below 400 thousand claims. In normal circumstances we are worried about recessions when claims are rising above 350 thousand claims. Furthermore, jobless claims tend to plunge below 350 thousand a week within 12 months after the end of a recession. Currently we are still holding above 400 thousand claims after more than two full years since the recession statistically ended.
Those are some pretty ugly numbers, but the most important number is 5. The reason that we think unemployment might move sharply higher is that every time the STA Composite Employment Index drops to a level of 5 or less the economy has been in a recession. Of course, it is during recessions that unemployment claims rise sharply as businesses cut back on their labor force to reduce costs. This is clearly seen in the chart.
(Geeks Note: The STA Composite Employment Index is an average weighted index of the employment components of the Chicago Fed National Activity Index, seven different regional Federal Reserve manufactuing indexes, and the National Federation of Independent Business survey.)
It is not just the composite employment indicator that is causing concerns – it is the market itself. The S&P 500, when inverted, has a very high correlation to the level of jobless claims. The exception was the summer of 2010 where the market declined but jobless claims didn’t rise sharply. This was due to the introduction of QE2 which staved off an impending recession. However, on average sharp declines in the market, especially in advance of recessions, lead to sharp rises in unemployment claims.
With the economy chugging along at 1% currently, and most likely lower by the final revision, manufacturing indexes either in or moving towards contractionary levels, housing still under stress and corporate profits coming under pressure and Europe in complete disarray; there are plenty of catalysts to create push the economy off a very narrow ledge.
So, while the Administration is rolling out a new ”job recovery plan” in the coming days – the indicators may already be saying that it is a plan that is too late in coming.
21 Comments
Either that or the market is going to rally big time!
Meeting today with employee of defense company. Worked there 35 hrs. High level..doing VRIF of 500 people. Not yet hitting news will be by 2011 yr end.
Clients who are executive directors for fortune 500 clients HR dept.
They are laying off another round.
I could do this all day long……Ill tell them not to worry hiring is about to surge….jobs everywhere galore.
Better sell my stocks….looks like profit margins will compress due to headcount costs.
Everybody see the news that big lawsuits are pending against the biggest banks by the Us govt.??? This is the FOUNDATION for the BIG NEWS and program that is coming from the Federal Government.
HUGE BALANCE SHEET HEALING, and another TRILLION of stimulus from the Fed is on deck.
Watch it f’ing happen. Bruce Kasting has been doing some brilliant work on this.
If Euro gets resolved, this market is going to the moon, imho.
take a rest before you blow your neuron.
Suck it quark! lol.
Come on guys, can you not see this coming. Am I insane? Do you not think this is coming???!!! It is being telegraphed…
Get mother f’ing long the market and get long now. HUGE NEW STIMULUS IS BEING INTRODUCED IN A MONTH OR SO.
Direct balance sheet repair plus a trillion or so new QE from the Fed.
The rest of the morons sell all their stocks. IMHO it is the mother f’ing time to buy like a madman. Good luck to all.
I think you’re delusional given the current political climate. For anything to happen, first there must be recession.
So there will be worldwide recession in last months of 2011, beginning 2012. Then there will be stimulus packages probably and Obama has something to run on the elections against GOP deficit/monetary hawks.
Third quarter of 2012 may be hyperbullish then. But still have to see what will happen in Europe. Then there is the question of commodity prices and cost-push inflation, etc.
Don’t know about the direct QE, but agree with “Direct balance sheet repair”
Bernanke has something up his sleeve.
Possibly: Direct balance sheet repair and Jobs program (no QE).
Either way it could take off for at least a mini rally, but but but the next round of layoffs will send it down. Might be THE time to get in then. Keep an eye on Europe though.
Prescient1…the only way we make new highs is the fed it treasury opens up a stock trading desk. The political will does not include san effective stimulus program. The time has passed for the bulls. I wish you too the best but I fear you r only offering. the bears liquidity…save your amp for the final attack on the s&p near the 670 turn.
Guys,
He can do everything that is needed WITHOUT CONGRESSIONAL APPROVAL.
1) Huge mortgage refinancing at 4%.
2) Fed’s balance sheet is AUTOMATICALLY reduced by about $1T.
3) Result = big big big time balance sheet repair, improved housing and job markets, and the Fed gets to KEEP ITS BALANCE SHEET neutral while buying another $1T of whatever it deems appropriate.
Who is going to argue with this? Pubs in the house, please.
And thanks quark, yeah I feel the same way sometimes looking at my account…
We’ll see what comes!
Regarding the second figure, is the level of the S&P 500 altered by the extremely low current interest rates forcing investors into the stock market and other “risky” investments? Does this change the correlation between the S&P 500 and initial jobless claims?
Think about QE2. Correlation will tighten after the effects disappear and leverage is reduced in finance (margins included).
The deep and consistent intrusion by the Federal Government in all economic sectors is approaching the micro-management level. Few business decisions can be made with any certainty except for the certain deliberation of what elements of federal oversight or regulatory statutes will weigh upon them. Whether it’s new hires or production expansion, small or large, business and corporate entities are distracted from the basic profit motive by federal restrictions. The president’s upcoming speech on his job creation program promises to be a simple rehash of policies already attempted at great expense and proved to be failures. Infrastructure rebuilding, green energy, jobs banks and retraining, all rolled out over 18 months and clearly unsuccessful is the likely offering. It’s the problem with idealism versus pragmatism. Our political leadership is devoted to a socially equal ideal world within a largely capitalistic system, the two viewpoints have no viable common ground.
Charles, there may be a grain of truth to that, but how do you square your assertion with record corporate profits? Apart from Financials, the corporate sector experienced only a brief mini-recession overall.
The real problem appears to be overall demand, which requires very different approach than deregulation. I suspect most business would accept existing (and perhaps even threatened?) levels of federal regulation if they could be confident of high and growing demand for their goods and services.
Lets hope you are right prescient11
Ive been wondering, but do you think the GOP will allow that?
Our political leadership is devoted to a socially equal ideal world within a largely capitalistic system, the two viewpoints have no viable common ground.
Our leaderships pays lip service to the idea of social equality.
The actual polices they enact paint a different picture, a society more unequal than anytime since the glided age.
Who are they going to layoff? Barely any hiring happened in the US since 2009 recession. I know we don’t have anybody to layoff anymore. We are still short people. Wanted to hire this summer but had trouble finding qualified people.
Unless the crisis goes full swing again and economy freezes up layoffs should be at the present rate. Unemployement rate will go up due to no hiring, not the layoffs.
“Wanted to hire this summer but had trouble finding qualified people.”
To do what? And at what salary? Your claim is difficult to fathom with millions out of work. Or are you ‘filtering out’ those who are not currently employed?
Enterprise applications for finance, salary in 80-120K range, requires IT, project management and finance knowledge, very specialized. Yeah, I am underpaid ((. I have 3 masters degrees . These hard to combine and find skills are the only barrier to my job being outsourced to Bangalore.
But compared to $40 a month I used to make as top college grad in my home country 15 years ago, when I graduated, this is a great life .))
ES that is hilarious. “But compared to $40 a month I used to make as top college grad in my home country 15 years ago…”
that made my day.
Shouldn’t that be “almost” every time….see 3/1/1992
and shouldn’t that be “BELOW” the 5% level, since no mere touch of the 5% level has been associated with a recession?
So I think this is saying: “IF we go into a recession, expect the STA Composite Employment Index to fall below 5%.”
OK.
Noted.
Not helpful.