Initial jobless claims dropped 1k to 266k (from a downwardly revised 267k) remaining near 43-year lows. Here’s why that’s odd…
Who do you believe?
The BLS’ Productvity (collapse) data or The Department of Labor’s claims (constant stream of improvement) data?
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But not all is well ini initial claims land, as MoneyBallEconomics.com explains… Jobless Claims Trend: It’s 2007 All Over Again
People looking at jobless claims think the economy is getting better…
But that’s because they don’t understand the ebb-and-flow of layoffs.
Sure, we’re seeing lower jobless claims this year compared to last
year. Also, the trend has been falling jobless claims – from 277,000
this past May to about 254,000 in July. That is definitely a sign that
the economy is still expanding and demanding more workers (the #1 reason
for fewer layoffs.) Even better, the number of claims is hitting
extremely low nominal levels.
Except there’s a different reality at work.
First, that recent drop to 254,000 was a quirk that has already
passed: claims this week moved back to 269,000. That quirk comes from
the seasonal adjustment related to July: factory workers tend to get
laid off in July when factories undergo re-tooling. For example,
Michigan’s Jobless Claims (not seasonally adjusted) more than doubled
from June to July: from 25,000 to 54,000.
The result being the report overcompensates and sends jobless claims
down more than necessary. It is why, with July over, claims shot back
up… And that year-over-year gap has faded. Claims are now running higher
than the same weeks last year.
This means that the economy has stopped growing.
In fact, the decline in jobless claims is following the exact same
cycle as the ones in 1989, 2000, and 2007. A bottom gets hit and then
claims rise and then surge.
Each time it followed this cycle… it led to recession.
You see, there are four basic stages of labor demand during every business cycle.
1) Recession Job Cuts: In a recession, supply
(people looking for work) sharply exceeds demand (businesses hiring.)
Layoffs surge as businesses cut inventories of people and goods.
2) Post-Recession Restocking: After the recession,
job cuts slow. Some labor demand even starts to creep back in as
businesses were too lean and now need to restock. The jobless claims
year-over-year (yoy) is sharply negative
3) Mid-cycle Inventory Expansion: The business cycle
shifts from being backward looking (i.e. less about restocking lean
inventory) and turns forward looking (i.e. investing for expected future
demand.) The initial claims yoy metric starts to move up because of
unfavorable comps: initial claims are still falling but at a slower
rate. (The pace of expansion is slower than the previous year’s pace of
restocking.) The yoy rate bubbles up.
4) Pre-Recession End of Inventory Expansion: An
equilibrium in labor demand has been reached and existing staff levels
meet expected demand. Layoffs pick up as employers look for profit
growth and production efficiencies. Claims yoy rise 100%.
This pattern repeats itself every business cycle… with some secular twists.
Today’s secular twist is better inventory management.
Thanks to the internet, businesses have much more efficient inventory
management. This allows tighter visibility so companies know actual
end-user demand.
Take a look at the ISM Manufacturing Inventory Index since 1948:
It’s easy to see the internet era has stabilized inventory management.
Better inventory management means a longer, yet less volatile
business cycle. The longer business cycle happens for a few reasons.
Businesses are less surprised by shifts in demand. They are no longer
surprised by sudden shocks to inventory… whether it’s ramping up or
down.
Reduced manufacturing means less capital expenditures. The industrial
base’s share of the economy shrinks, so spending on factory equipment
takes a smaller share of the overall gross domestic product (GDP.)
Businesses enjoy flexibility when it comes to big ticket IT software.
Instead of spending millions all at once… they rent it through the
cloud from companies like Amazon and Microsoft.
Businesses also enjoy flexibility with labor. Unions have lost power…
which allows businesses to easily hire and fire almost at will. So,
like inventories of goods, companies don’t have to stockpile workers,
but can ramp up or down (hire or fire) as needed. The traditional
pattern is for claims to rise gradually and then suddenly surge. Because
of the less volatile business cycle, the rise in claims may last longer
but it will happen. And so will the surge.
KEY POINT: Claims are ticking up. By September, they
will be well above last year’s levels. I call out September because
another reason for low claims has been a strong California harvest
season that has kept farm workers around longer. But the season winds
down in September and instead of a trickle of farm worker layoffs, it
will be a sudden flood. We saw the same exact cycle play out in 1989,
2000, and 2007. Far from being a sign that all is well, jobless claims
are telling us that we are approaching the recession
via http://ift.tt/2aMceFV Tyler Durden