In a repeat of last week, the headline number of initial unemployment claims disappointed, the prior week’s numbers were revised upward by several thousand, but the underlying, non-seasonally adjusted data actually looked pretty healthy. However, we’re now skeptical that it implies a lower risk of recession.
The downtrend in non-seasonally adjusted (NSA) claims remains intact:
The four-week moving average (4W MA) of NSA claims has fallen below its September 2008 level (however, if recent upward revisions continue, this may turn out to be false):
It’s worrisome that, if we assume the Bureau of Labor Statistics (BSL) is getting the volatile seasonal adjustment factors correct, then the incipient uptrend in seasonally-adjusted (SA) claims (blue line in the prior chart) is not a good omen.
And finally, given that the rate of unemployment is much higher now than it was going into the last recession, is it possible that NSA numbers look dovish because so many people have already been laid off?
To assess that question, we adjusted the claims data by the size of the civilian labor force. As the next chart shows, a strong upturn in this ratio has been a good leading indicator of recession over the last forty years, and a peak tends to coincide with the end of recession (perhaps due to the recession-dating methods of the National Bureau of Economic Research).
While the current level may not appear too alarming, there are two important facts to note: (1) it appears to be bottoming well above the lows of the last two decades, and (2) it remains at a level that has coincided with past recessions. In other words, there’s nothing about the current level that argues strongly against another recession:
Taking a more granular look at the data, we can compare the ratio at the onset of past recessions. By this measure, we should be concerned today, especially if SA claims continue to trend upward while labor force participation remains depressed:
And finally, if we condition the prior chart on the demographic (age structure) trends identified by economist Diane Macunovich and others, which took a negative turn in the late 1990s and will remain in a negative trend for most of this decade, then today’s ratio actually becomes quite worrisome:
As the graph shows, the median ratio at the start of the last two recessions, when negative demographic headwinds were at work, was 0.25%, while the current level is 0.26%.
Thus, despite the dovish-looking NSA claims data, there’s nothing about it that takes a recession off of the table. And given that almost every other indicator we watch is signalling or very close to signalling a recession, it tells us that risk aversion may still make sense.
We continue to expect a bear market in risky assets between 2011 and 2013, and believe its severity will depend heavily on whether policymakers, especially in the European Monetary Union (EMU), Japan, UK, and U.S. continue to pursue austerity measures (worse) or stop worrying and start to love sovereign deficits (better). Importantly, if a balanced budget amendment gets traction in the U.S. or EMU (the worst possible outcome), then all bets are off.
Our clients remain defensively positioned in anticipation of things getting worse before they get better.
IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, or to engage in any investment strategy. Past performance is not indicative of future results. This material does not take into account your personal investment objectives, your personal financial situation and needs, or your personal tolerance for risk. Thus, any investment strategies or securities discussed may not be suitable for you. You should be aware of the real risk of loss that accompanies any investment strategy or security. It is strongly recommended that you consider seeking advice from your own investment advisor(s) when considering any particular strategy or investment. We do not guarantee any specific outcome or profit from any strategy or security discussed herein. The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such. SCM is a participant in the Amazon.com Associates program, and earns a revenue-sharing fee for qualified click-through purchases from the Amazon.com website. Neither the firm, nor its principals, nor its clients own securities issued by Amazon.com.