Gains in Employment Likely As Good As It Gets?

Written by Steven Hansen

Most believe there is something wrong with jobs growth – and the current jobs growth is anemic compared to the past.  While it is true that jobs growth is not good today, it is not much worse than most of the growth in the 21st century.

  • The monthly non-farm private payroll data is very noisy so it is difficult to get a clear perspective of growth;
  • The highest twelve month rolling average in the 21st century of monthly non-farm private jobs gains was in early 2006 when the employment gains averaged 225,000 per month.
  • The highest twelve month rolling average in the 1990’s of monthly non-farm private jobs gains was in early 1995 when the employment gains averaged 305,000 per month.
  • The highest twelve month rolling average since the Great Recession of monthly non-farm private jobs gains was in January 2012 when the employment gains averaged 189,000 per month.  Currently the average is 155,000.

Many keep their eyes on the weekly initial unemployment claims to get a feel of how the employment situation is shaping up.  The graph below plots non-farm private employment (red line, right axis) against weekly initial unemployment claims (blue line, left axis).

Even though the data in the above graph is seasonally adjusted, the variation from month-to-month (noise) is significant.  The data in the above graph has been replotted removing the noise by using a twelve month rolling average.

The grey line added is at 100,000 per month non-farm private jobs growth.  Please note that except for the Great Recession recovery – jobs growth started returning to normal once weekly initial unemployment claims fell below 400,000 per week.  The Great Recession employment recovery started when initial weekly unemployment claims fell to only 460,000.

My opinion and observations of using of weekly initial unemployment claims to forecast employment:

  • the average weekly claims in recent history seldom falls below 300,000;
  • once employment growth stabilizes following a recession, weekly initial unemployment claims are not that intuitive of employment growth;
  • the current jobs growth is approximately at the levels seen during the better economic times of the 21st century – regardless of the ups and downs in the weekly initial unemployment claims.

Over a year ago John Lounsbury observed that the relationship between initial claims and jobs growth shows a different functional dependence depending on whether the trend in initial claims is rising or falling.  He has not returned to that study for an update or elaboration on how his observation might be used.

There are all sorts of rhymes about history repeating, but it is clear that the historical relationship between initial claims and employment gains was different in the Great Recession recovery.  Even ignoring the difference, at this point in the economic cycle historically:

  • both initial claims and the monthly employment gains can fall at the same time.
  • both initial claims and the monthly employment gains can rise at the same time.
  • initial claims and the monthly employment gains can move in opposite directions.

In other words, watching the initial unemployment claims at this point is not intuitive in understanding the employment situation.

Other Economic News this Week:

The Econintersect economic forecast for October 2012 showed growth, but there was a serious degradation of the elements in the forecast. Overall, trend lines were broken to the downside. There is a diminishing whiff of recession in the hard data (plus a diminishing number of surveys are at recession levels), with container imports expanding for the first month in the last three.

ECRI is still insisting a recession is here (a 07Sep2012 post on their website). ECRI first stated in September 2011 a recession was coming . The size and depth is unknown. The ECRI WLI growth index value is enjoying its ninth week in positive territory. The index is indicating the economy six month from today will be slightly better than it is today.

Current ECRI WLI Growth Index

/images/z weekly_indexes.PNG

Initial unemployment claims fell slightly – from 388,000 (reported last week) to 369,000 this week. Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate (background here and here). The real gauge – the 4 week moving average – rose insignificantly from 365,500 (reported last week) to 368,000. Because of the noise (week-to-week movements from abnormal events AND the backward revisions to previous weeks releases), the 4-week average remains the reliable gauge.

Weekly Initial Unemployment Claims – 4 Week Average – Seasonally Adjusted – 2010 (blue line), 2011 (red line), 2012 (green line)

/images/z unemployment.PNG

Data released this week which contained economically intuitive components (forward looking) were:

  • Rail movements (where the economic intuitive components indicate a moderately slightly expanding economy).
  • The trend lines of the CFNAI index do have intuitive elements, but the elements are mixed even though the index improved in September.

All other data released this week either does not have enough historical correlation to the economy to be considered intuitive, or is simply a coincident indicator to the economy.

Weekly Economic Release Scorecard:

Advance Estimate 3Q2012 GDP is 2.0%
Infographic of the Day: $83.8 Billion Back-to-School Shopping Spree
Top-10 American Misconceptions about Mitt Romney
Initial Unemployment Claims Back to Trend
Trading More Than One Currency Pair
Japan: Stimulus and Radiation Problems
New Evidence: First Americans Likely Came from Europe, Not Asia
Rail Week Ending 20 October 2012: Still Good Improvement Ignoring Coal Shipments
Kansas City Fed: Manufacturing Activity Contracts in October 2012
September 2012 Pending Home Sales Continues to Predict Softening
CFNAI Super Index Improves in September 2012
20October2012 Unemployment Claims: Four Week Average Grows Slightly
Durable Goods New Orders Improves (but still soft) in September 2012
Infographic of the Day: Is Social Media Deciding this Election?
Stratfor: The Purpose of Presidential Debates
Waiting for A Document Security Windfall
James Bond, Buffett’s Martian, and Europe’s New Gold Standard
Trucking Tonnage Improves in September 2012
The Great Debate©: Did Fannie and Freddie Cause the Great Financial Crisis?
24 October 2012 FOMC Meeting Statement: No Changes, Holding Course
Confusing Models and Reality
Bank of America: Sued for Defrauding Government
Infographic of the Day: Driving on Winter Roads
September 2012 New Home Sales Strong Gains Continue
Cyber Wars Escalating
Nine Steps to Prosperity
Investing: Data Needs Context
China: PMI Improves Sharply but Still Below 50
The Fiscal Multiplier; A Real Shape Shifter
Richmond Fed Manufacturing Activity Contracts in October 2012
Philly Fed USA Coincident Index Gains Again in September 2012
Infographic of the Day: College Quality Can Impact Your Future
International Regulation Needed for Ag Swaps
Trading Range Resolution for EURUSD?
Conflicting Consumer Data
Prudential: Too Big to Fail?
Average Gasoline Price Falls A Big $0.13 Week Ending 22 October 2012
Insider Trading 19 October 2012: Dynavax Technologies Big Seller This Week
GE Issues Stern Warning Words to France
Vehicle Traffic Volumes Rise 1.2% in August 2012
Infographic of the Day: Obama vs Romney
An Exchange Rate Myth Puzzles the Financial Times
Irrationality and Economic Behavior
Where to Find Retirement Income
Japan Exports Plunge
Australia Economy Slowing Down, Government Raising Taxes, Cutting Spending
Four Key Lessons for The Coming Week
Sunday Economic Comedy: Economic Sex Is Not Good All the Time
Infographic of the Day: Is Silver the New Gold?
The Week Ahead: More Disappointing Outlooks?
What’s This Presidential Election All About?
The Week That Was 20 October 2012
Michael Hudson Comments on the Financial Mafia
Trefis: Highlights Week Ending 19 October 2012
Is Resistance Futile? Thought Control
Swallowing Obama’s and Romney’s Magic Economic Pills
Stocks, Gold and Silver All Projected to Go Down

Bankruptcies this Week: Privately-held HMX

One reply on “Gains in Employment Likely As Good As It Gets?”

  1. The key to growth and recovery is not unemployment or initial claims or U6, it is whether total after tax and transfers income within the country is growing, perhaps with some adjustment for dramatic changes in military deployment, or employment where a large part of income is repatriated. In the absence of significant tax, transfer and military changes, total payrolls are a good proxy, which means income tax and sales tax collections are a good proxy.

    I agree wholeheartedly that from an investment point of view, a focus on unemployment rather than employment and net income changes risks missing the growth boat.

Comments are closed.