Jobless Claims Fall To A Cycle Low

Jobless Claims Plummet

The labor market is likely healthy as jobless claims plummeted again as both the weekly claims and the 4 week average are at cycle lows. They are at their lowest levels since 1969 when the labor market was half the size it is now. Keep in mind, the number of people applying for and getting unemployment benefits is down. 

It’s tougher to get them and less benefits are offered by states. The labor market isn’t by far the best ever as the jobless claims as a percentage of the labor market implies.

The fact that the labor market isn’t the best ever is actually a good thing because it would imply there’s little room for hiring growth and that there’s little slack in the labor market. On average when claims are near their trough and the unemployment rate is low, forward returns are low. 

Low claims in the past few years didn’t mean stocks were about to decline because there was still slack in the labor market. The same is true now except the slack has diminished.

As you can see in the chart above, the number of claims in the week of April 12th was 192,000 which was down 5,000 from the prior week and down 20,000 from 3 weeks before. It beat estimates for 206,000. The 4 week average fell from 207,250 to 201,250. On a yearly basis, the 4 week average is down 10.8%. 

As a leading indicator, jobless claims support the ECRI leading index and the stock market. Continuing claims, which are delayed by a week, support the thesis that the labor market is strong as they fell 63,000 and the 4 week average fell 22,750 to 1.713 million.

Jobless Claims - New Record For Leading Indicators

March Conference Board leading indicators index hit a new record as you can see from the chart below. It will be strong in April as jobless claims have fallen and stocks have risen. The index was up 0.4% monthly which beat estimates for 0.3% growth and the prior reading of 0.1% growth. March’s growth was helped by jobless claims, consumer expectations, and financial conditions.

Even with this improvement, the Conference Board stated, “Despite the relatively large gain in March, the trend in the US LEI continues to moderate, suggesting that growth in the US economy is likely to decelerate toward its long term potential of about 2 percent by year end.” 

Growth falling towards the long term trend clearly isn’t a disaster, but I think this is old news. The slowdown is close to its end, not just starting. By the end of the year, the economy will be accelerating again.

Jobless Claims - Weekly ECRI Index’s Growth Rate Explodes

As you can see from the chart below, the ECRI leading index is now up 1.2% yearly which is better than the 0.2% growth seen in the last report. 

This index is closely following the stock market as yearly gains have quickly improved. The S&P 500 is now up 7.25% year over year. Next week the coincident index from March will come out. I expect its yearly growth rate to fall, but potentially trough this spring.

Even though the ECRI leading index has been increasing since the start of the year and is closing in on its January 2018 record high, ECRI the company isn’t sold on the bullish narrative. The firm stated if its leading indexes turn back down, there might be a recession later this year. I don’t agree with this concept because that’s like saying if GDP crashes, there will be a recession. 

Jobless Claims - There needs to be a catalyst for both the ECRI leading index and GDP to fall. 

Right now, I see some green shoots. I don’t see any chance of a recession in 2019.

A second point ECRI made was that if the leading indicators make a fresh cyclical upturn, like they appear to be doing now, the Fed will find it tough to hold off further rate hikes. I agree that the Fed could hike rates next year, but it’s unlikely to hike them this year. There is still enough economic weakness for the Fed to continue its pause at its next meeting in May.

After that, there are only 5 more meetings for the Fed to potentially hike rates this year. There also needs to be a buffer to get the market acclimated to rate hikes. If it put rate hikes back on the table in June, there probably wouldn’t be a hike until the end of the year. 

This is all speculation which doesn’t show up in the Fed funds futures market yet as there is a 0% chance of a hike and a 42.9% chance of a cut by December.

I don’t agree with the concept that you must be bearish because the economy could weaken or strengthen so much that rate hikes hurt the economy and stock market. There is a happy medium. That’s the current situation that has allowed the economy to avoid a recession and stocks to soar.

Jobless Claims - Philly Fed Index Falls

I don’t see the manufacturing sector turning up until the Chinese economy shows more improvement and there is a trade deal. However, I also don’t see it getting as bad as it was in 2016. The April Philly Fed index supports this thesis. 

General business conditions index fell from 13.7 to 8.5 which missed estimates for 10.2. Just like the Empire Fed reading, the Philly Fed’s 6 month forecast was weak. 

As the chart below shows, the index fell from 21.8 to 19.1.

The best part of the current index was the increase in the new order index from 1.9 to 15.7. The weakest part of the index was inventories which fell from 17.2 to just 2.6. Inventories are the least important category and new orders are the most important. 

Prices paid increased slightly to 21.6 from 19.7 and prices received fell from 24.7 to 20. In the 6 month forecast, new orders rose from 19.8 to 23.9. Shipments increased from 20.5 to 23.1. Finally, capex increased sharply from 19.5 to 30.9. 

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