Jobless Claims DO NOT Signal A Recession
Jobless claims are the thorn in the side of the bears. We keep hearing from the bears about how jobless claims will spike, but it never happens (on a sustainable basis). Let's discuss 2 important misnomers heard from the bears.
First is the bears say initial claims are a lagging indicator. It seems that because some labor reports are lagging indicators, the bears assume every labor metric is a lagging indicator. Initial claims are literally in the leading indicators index.
It’s disingenuous to claim only the reports that are negative are leading indicators. Reality is the ratio of the leading index to the coincident index shows this is a slowdown, not a recession. Perma bears have been wrongly calling for a recession for 10 years. So whenever there is a slowdown, they jump on the possibility of a recession. This is noise. Just look at the data.
A second point the bears make which is a misnomer is that because jobless claims haven’t been falling and appear to be range bound, this is an early sign of a coming spike. That’s not true. Jobless claims are extremely low. There’s a limit to how low they can go.
Recessions occur after claims are low because there is usually inflation. The Fed reacts to inflation with rate hikes, ending the expansion. The opposite is happening now as the Fed is cutting rates to deal with the slowdown. To get a better picture of this situation, I created the chart below. It is the yearly growth in the quarterly average of the 4-week average of initial claims.
As you can see, in Q3 the yearly growth was -0.3%. Claims are always increasing during recessions and sometimes claims increase when there isn’t a recession. Yearly growth has never been positive this cycle. The signal is clear. There is no recession.
Jobless Claims Fall
Now let’s look at initial claims from the week of October 5th. Claims fell from 220,000 to 210,000. That was 9,000 below estimates. Claims have been range bound for the past year, but they are already at a record low in relation to the population. This is like a baseball hitter with a batting average of 40% (amazing average) after he batted 40% the previous year. There’s only a certain amount you can improve.
Jobless claims can’t go below 0. Yearly growth was -0.9%. Even with claims this low, they are still falling. The 4 week average increased 1,000 to 213,750. Continuing claims (delayed a week) weren’t as good.
They increased 29,000; the 4 week average increased slightly to 1.655 million. There is nothing new with any of this data. But I needed to go in depth to show how it’s not bearish since recession fears are high.
CPI Misses Estimates
PPI report was a leading indicator of how the CPI report would turn out. CPI fell and missed estimates. Specifically, in September monthly CPI was 0% which fell from 0.1% and met estimates. Yearly CPI was 1.7% which was the same as August, but missed estimates for 1.8%.
Monthly core CPI was 0.1% which fell from 0.3% and missed estimates for 0.2%. As expected, core CPI was 2.4% yearly which was the same as August on a rounded basis. You can see in the chart below that core CPI fell very slightly. It was down from 2.39% to 2.36%.
Headlines couldn’t say this was a multi-year high in core inflation, but nothing has changed. It’s still above 2%, but its decline implies core PCE will be below 2%. Meaning, the Fed will have no trouble cutting rates. It’s good that the Fed can cut, but it’s bad that there’s need for them.
It’s worth taking a microscope to this report since it’s so important and the change in core CPI was so small. A decline looks slightly worse when you look at comps.
Core CPI fell last September. It fell from 2.2% to 2.17%. That means the 2 year stack fell 6 basis points. The comp in October gets slightly easier and then it gets harder than both months in November.
Specifics Of September CPI
Once again energy was the reason headline CPI was below core CPI. Since I use headline CPI to look at real wages, energy has been a boon for real wage growth. Energy inflation was -4.8%. Energy commodities inflation was -8.2% and energy services inflation was -0.1%.
Food inflation was in between headline and core inflation as it was 1.8%. Food at home inflation was only 0.6%, while food away from home inflation was 3.2%. This is probably because the tight labor market is causing restaurants to raise wages. Full service and limited service inflation were 3.6% and 3%.
Now let’s look at the drivers of core CPI. Core commodities inflation was 0.7% and core services inflation was 2.9%. This is the same situation was I mentioned with food services. The labor market is generating wage inflation.
In the commodities segment, new vehicles inflation was just 0.1%. Those companies with declining sales that I described in a previous article, can’t afford to raise prices. Instead they are giving record incentives. This month was the same as last month in that medical care services drove core inflation.
It was 4.4% which is up from 4.3%. That’s the highest rate since September 2016. The comp got 0.1% higher, so the 2 year stack was up 0.2%. Health insurance inflation was 18.8% after it was 18.6% last month. Medical care services is 8.7% of CPI.
Looking at the rest of core services inflation, shelter inflation was 3.5% and transportation was 0.8%. As you can see from the chart below, rent of shelter inflation has been stable for the past few years.
It is 33% of CPI. Owner’s equivalent rent is calculated by using rents which explains why it hasn’t risen and fallen with the Case Shiller home price index.
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