Initial claims move closer to red flag recession warning
Initial claims move closer to red flag recession warning
– by New Deal democrat
Initial jobless claims declined -12,000 last week to 237,000. The four week average declined -6,750 to 246,750. With a one week delay, continuing claims increased 11,000 to 1,729,000:
More importantly for forecasting purposes, the YoY% increases were 7.2% for the weekly number, 14.5% for the 4 week average, and 31.6% for continuing claims respectively:
This is the 4th week in a row that the 4 week average has been higher YoY by more than 12.5%. If this continues for several more weeks, that would be sufficient to trigger a red flag recession warning from this series.
Finally, since initial claims have a long-established history of leading the unemployment rate, here is the comparison of YoY claims averaged monthly (blue) as well as the 4 week average, compared with the YoY% change in the unemployment rate (gold):
Note importantly that the graph above measures the change in the unemployment rate as a “percent of a percent,” so for example a 10% increase from 3.6% would be just below 4.0%. To trigger the Sahm rule, we would need a 0.5% increase in the actual rate from the 3-month average of the lowest unemployment rate in the past year. To put it plainly: for forecasting purposes, we’re not there yet. But since the Sahm rule tells us retroactively when we have started a recession, it doesn’t affect my own forecasting analysis.
Initial jobless claims: moving closer to a red flag warning, Angry Bear, New Deal democrat
There’s a hidden recession red flag hidden in the latest jobs report, according to two top economists
Fortune – July 11
The Bureau of Labor Statistics job report for June contained a pivotal number that may well raise the first convincing statistical signpost that the U.S. economy has made the turn and is heading for a recession. That’s the view of two top economists, one from Wall Street, the other from academia, who closely watch the employment figures to spot enduring trends, as well as weigh what the Fed-engineered money supply shrinkage, and apparent determination to keep hiking rates, foretell for the path forward. “This jobs report harbored the first indicator that the U.S. will slow down a lot, and by our forecast enter a recession, in the second half of 2023,” says Eugenio Aleman, chief economist for brokerage Raymond James. Adds Will Luther, an economics professor at Florida Atlantic University, “When the jobs numbers are suddenly pointing towards weakness and rapidly falling inflation, the Fed’s plans to keep over-tightening puts the economy on dangerous ground.” …
(Behind a paywall. Go figure.)
Everything’s Coming Up Soft Landing
NY Times – Paul Krugman – July 13
The latest numbers on consumer prices arrived on Wednesday, and they were better than even optimists had expected. Even media reports, as far I can tell, generally omitted the “but concerns remain” qualifiers that have seemed mandatory when covering good news about the Biden economy.
Which is not to say that everyone was happy. Republicans are more or less in denial, no doubt worried that they may be losing pretty much their only substantive campaign issue — leaving them with nothing to run on besides wokeness and Hunter Biden. And there have been some fairly peevish reactions from economists who had committed themselves to the grim view that we would face a nasty “sacrifice ratio” — that controlling inflation would require years of high unemployment.
For this report was anything but grim. It strongly suggested that we may be heading for a soft landing — a return to acceptable inflation without a large rise in unemployment. We’re not there yet, and I’ll talk shortly about what may still go wrong. But a happy outcome that not long ago seemed like wishful thinking now looks more likely than not. …
… Finally, we might get a recession even if we don’t need one to control inflation. So far the economy has proved remarkably resilient in the face of rising interest rates, but monetary policy often works with a lag, so there might, to mix metaphors, still be a recession in the pipeline.
So we haven’t touched down on the runway yet, and a soft landing isn’t guaranteed. But it now looks amazingly within reach.
Previously…
Dude, Where’s My Recession?
NY Times – Paul Krugman – July 11
… So it sure looks as if economists made a bad recession call. Why were they wrong?
One answer might be to ask why anyone would expect them to get it right. A few years ago, the International Monetary Fund did a systematic study of the ability of economists to call recessions in advance, and basically found that they never succeed. As the authors noted wryly, there was little to choose between private and official forecasts: “Both are equally good at missing recessions.”
In a way, however, the I.M.F. study isn’t that relevant to what we’ve just seen. The authors found many examples of recessions that happened but that forecasters failed to predict; what we’re seeing now is a recession that forecasters predicted but failed to happen. So where did this almost unanimous but, as it turns out, unwarranted pessimism come from?
I know that at least some forecasters were looking at a certain financial indicator: the spread between short-term and long-term bonds. An inverted yield curve, in which long-term bonds pay lower interest than short-term, has historically predicted recessions …
… the meaning of an inverted yield curve is widely misunderstood. It doesn’t cause a recession. It is instead an implicit prediction about future Fed policy — namely, that the Fed will cut rates sharply in the future, presumably to fight a deepening recession. So the inverted yield curve wasn’t really independent evidence, just a market reflection of the same “recession is coming” consensus you were hearing on cable TV. …
Wall Street’s Recession Warning Is Flashing. Some Wonder if It’s Wrong.
NY Times – July 12
Some investors believe that a recession warning that has been flashing on Wall Street for the past year may be sending a false signal — and think instead that the Federal Reserve will be able to tame inflation and still escape a deep downturn.
That signal, called the yield curve, has continued to reverberate in 2023 and is now sending its strongest warning since the early 1980s. But even though the alarms have been getting louder, the stock market has rallied and the economy has remained resilient, prompting some analysts and investors to rethink its predictive power.
On Wednesday, the Consumer Price Index report showed a sharp decline in inflation last month, further buoying investor optimism and pushing stocks higher.
The yield curve charts the difference in rates on government bonds of different maturities. Typically, investors expect to be paid more interest for lending over longer periods, so those rates are generally higher than they are for shorter-term bonds, creating an upward-sloping curve. For the past year, the curve has inverted, with the yield on shorter-term debt rising higher than yields on bonds with longer maturities. …
The Dobbs Index is up 4% for the year, after being down 22% last year, the worst on record (over the last 15 years.)
The 3 month minus ten year US debt instrument has reliably predicted recessions. The negative area under the curve represents a tremendous jamming down on the QT break pedal by the central bank. Most reasonable economists are expecting something bad in the near term.
Is there a better way to quantitatively assess the workings of the macroeconomy?
Expect the unexpected. Over the next 8 trading days, money exiting commodities, equities, and crypto will flow into US debt instruments driving US debt interest rates much lower. The March 2020 Ten Year Note weekly fractal sequence is 30/75/72 of 74 weeks. The 72 of 74 week third fractal is composed of a 4/10/10 week series followed by a 8/19/17/10 of 12 week series. The final 4th fractal 12 week series starts on 5/11/2023 and is composed of a 8/19/18/5 of 13 day sequence. The next 8 trading days would reasonably complete a 1981-82 13/30 year first and second fractal series, interpolated within the US hegemony 1807 36/90/90/54 year series with its 90 year third fractal (composite equity and crypto)asset valuation peak on 8 November 2021. Historical second fractal terminal 2x-2.5x area (26- 32 year) nonlinearity would result in both sudden and huge declines in equity and commodity valuation prices. The Fed may actually lower interest rates at the 25-26 July 2023 meeting to keep their policy in tune with US debt instrument actual market forces and a sudden drop in commodity and equity prices.