Is the Oil choke collar creating a new seasonality?

In the last two weeks there has been a sudden and significant increase in first time jobless claims. Last week Prof. Dean Baker wrote that the the increase is due to the non-winter winter distorting seasonal patterns.

Except that we had the exact same sudden and significant increase in first time jobless claims during the exact same two weeks last year, as is shown in the below graph which highlights April through June last year and claims since April 1 of this year in red:



That suggests that the our recent non-winter winter is not the reason for the difference.

Another suggestion has been that the BLS's seasonal adjustments were thrown off by the pattern during the severe recession, causing first quarter adjustments to bee too low, and second quarter too high. While that may be true, the BLS just a few weeks ago revised the entire series back several years to deal with that exact issue. Also, as the above graph shows, there was no significant increase in Q2 2010.

I propose another explanation. It may well be that the seasonal increase in gasoline prices from January through May or June of both last year and this year to nearly $4 per gallon, thereby tightening the choke collar on the economy, is reflected in an increase in layoffs. In other words, this is a new seasonal pattern that is only showing up in those years where the seasonal increase in gas prices sufficiently tightens the Oil choke collar -- as in 2008, 2011, and 2012.

If my speculation is correct, we will see a pattern very much like last year. Once gasoline prices begin to decline seasonally after midyear, the Oil choke collar will be loosened again, and layoffs will again decline.

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Temp hiring, initial claims vs. payrolls trend do not support recession

- by New Deal democrat

This week I am updating my outlook from January. Based on a decline in long leading indicators that bottomed about 12 months ago, I expected weakness but no recession in the first half of the year, followed by stronger growth in the second half, tempered by whatever happened to the price of gas.

In the past two days I've pointed out that neither consumer spending nor refinancing supports the recession thesis being put forward by a few prominent forecasters. Today let's turn to a couple of employment indicators.

Temporary hiring is generally considered a leading indicator. Before employers hire full time workers, they hire temps. Similarly, laying off temps typically happens before regular employees are let go. That is borne out by the below graph of temprary employment:



Far from turning down as it did in advance of both most recent recessions, it is still rising strongly.

If you insist on year over year comparisons, here is the same data in that format:



Note that temp hiring doesn't just decline, it turns YoY negative well in advance of the economic contraction. It is nowhere to be seen now.

Finally, let's look at an update of a graph I run almost every month, showing the comparison between initial claims and payrolls. Yellow markers are the months between the low in initial claims during the last expansion until June 2007. Red shows the five months immediately before the recession, up until the March 2009 peak in initial claims. Blue shows the trajectory during the recovery::



The point here is that entirely different trajectories are taken on the way into recession vs. the way out. Even initial claims between 325,000 and 350,000 were consistent with very low positive, or even negative monthly payroll prints.

No such pattern is present now. If last month gets revised down below 200,000, maybe then we have something to talk about. But virtually every month in the last year has been revised higher after the initial report.

In summary, neither temporary employment nor the trend in initial jobless claims vs. payrolls is consistent with either an ongoing or even a near in time recession.

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Apparently that huge new pool of unemployed Gallup found ...

... forgot to file for their unemployment benefits.

- by New Deal democrat

There's been quite a hubbub in the last week or so about a Gallup report that showed seasonally unadjusted unemployment growing 0.7% between mid-January and mid-February. This was contrasted with a seasonally unadjusted increase of 0.4% one year ago.

If there was an increase in unadjusted unemployment of 0.7% in the workforce -- that would be about a million people -- they should have showed up and filed for unemployment benefits by now. In other words, there should have been a surge in initial claims -- not just the number filed, but an increase -- of several hundred thousand at least.

Instead, non-seasonally adjusted initial jobless claims have fallen substantially since mid-January, and they've also fallen compared with one year ago:

2012-01-07 646219
2012-01-14 525422
2012-01-21 416880
2012-01-28 422287
2012-02-04 401256
2012-02-11 361928
2012-02-19 345,216

2011-01-01 578904
2011-01-08 773499
2011-01-15 549688
2011-01-22 485950
2011-01-29 464775
2011-02-05 440706
2011-02-12 424400
2011-02-19 380985

This is no slam against Gallup, I think they have proven their economic numbers as a valuable resource in the last year. But the fact remains that their sample size for unemployment is far smaller than either the 300,000 establishment survey or the 50,000 household survey, so it's best to look at the trend YoY than any individual month to month swing.

On a seasonally adjusted basis, 351,000 initial claims were filed last week. The 4 week moving average has declined from 377,750 in mid-January to 359.000 now. Since May of that year there has been a fairly constant ratio of changes in weekly initial claims to monthly job growth of roughly 1 to 2.75. That is, for every 10,000 drop in average weekly new jobless claims in a given month, the number of jobs added to the economy has improved by 27,500.



If that trend continues this month, then the most likely February payrolls number to be announced a week from tomorrow is about 50,000 higher than January's, or 293,000 (plus or minus a 75,000 variance).

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Take yesterday's initial claims number with a little grain of salt

- by New Deal democrat

With the exception of only one other week, yesterday's report of 381,000 initial jobless claims was the lowest in more than 3 years. While it is certainly reason for some optimism, keep in mind that with this week we have entered the period where the biggest seasonal adjustments have to be made to the raw initial claims number. As this graph of seasonally adjusted initial claims (blue) vs. unadjusted claims (red) shows, sometimes the seasonal adjustment can "overshoot" slightly (2007, 2008, 2009) and sometimes it appears on target (2010):



The large drop -- over 20,000 -- this week makes me suspect there may be a little bit of an overshoot at work.

Don't ignore the number. If there is an overshoot it may only be 5,000 or 10,000. But take this number, and the numbers for the next month or so, with a little grain of salt.

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Notes on Friday's employment report: positive trends intact, actual good news in household survey

- by New Deal democrat

Friday's employment report continued the trends of employment as continued to initial jobless claims that were established in March 2009.

First of all, here is the updated graph comparing population-adjusted initial jobless claims with payrolls:



This relationship was historically very close beginning in 1967 but broke down in 2009. For the last two years, however, the new relationship established then has continued. A change in the population adjusted initial jobless claims rate is mirrored in the unemployment rate, frequently with a 1 or 2 month delay:



I've also noted that if we were to be heading towards a "double-dip," we should expect the relationship between the number of initial jobless claims and employment growth to change, whereby in the net many more jobs are lost per any given rate of initial claims. Although there may be some very slight drift in that direction since April (brown points), it hasn't happened in any meaningful way:



The longer term leading relationship of initial jobless claims to the unemployment rate (comparing the last 6 months' average with the average over the same six month period one year prior) as measured by Thumbcharts is also intact:



Finally, back in December 2009, Prof. Paul Krugman said:

I thought it might be useful to create a sort of benchmark for the level of job growth that would really count as good news.…
[L]et’s set a … modest goal: return to more or less full employment in 5 years –which means seven lean years of depressed employment. To keep up with population growth over those 7 years, the United States would have had to add 84 times 127,000 or 10.668 million jobs. (If that sounds high, bear in mind that we added more than 20 million jobs over the 8 Clinton years). Add in the need to make up lost ground, and we’re at around 18 million jobs over the next five years — or 300,000 a month.

So that’s a useful benchmark.

(emphasis mine)

With that in mind, here's a graph of monthly gains in civilian employment from the Household Survey since its bottom:



No, it isn't the more generally reported Establishment Survey data, but the Household Survey does tend to lead at inflection points, and for the last 4 months, the average employment gain in the Household Survey has been 321,000/month, with the lowest being 277,000. I'm not nitpicking the Professor, but it's worth noting that this does meet Prof. Krugman's threshold criteria for actual good employment news.

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Getting deep into the weeds about Jobs, Jobs, Jobs

- by New Deal democrat

It's been quite a while since I looked at detailed metrics of future job growth, something I devoted a lot of time to a couple of years ago. With a divergeance in forecasts between recession vs. continued growth, this is a good time to take another look. Some of the metrics have performed better than others. Many continue to support optimism, but at least one is downright ominous and may be telling us that revised jobs data will show substantial job losses from earlier this year.

1. V shaped real retail sales and industrial production recoveries vs. jobs:

One point I frequently made is that this is a "bifurcated recovery", where manufacturing and sales are performing much better than job and income growth. Although we've had a recent slowdown in some ISM series, the description of a "bifurcated recovery" is still valid.

Real retail sales and Industrial production are still in V shaped recovery mode. Real retail sales have recovered 80% from their trough, and industrial production two-thirds:



Comparing those with private jobs (red) and total payrolls (green), we can see that the percentage losses in sales and production were steeper, and have made up nearly or more than all of their ground compared with jobs. Meanwhile, private jobs have regained only slightly over 30% of their losses. When government employment is added for the total jobs picture, less than 25% of the losses have been regained:



2. Comparing improvements in aggregate hours and jobs:

Another point I have frequently made is that aggregate hours worked are recovering faster than new jobs. Since more hours were lost than jobs during the recession, if past was prologue then we would have to wait for aggregate hours to regain their lost comparative ground before job growth would match the growth in hours. This is still the case:



If the trend continues then by about next summer aggegate hours (red) will have made up all of their comparative losses with jobs (blue) and we can start to expect job growth to fully reflect growth in hours.

3. Comparing real retail sales with jobs:

The closest thing I found to a "holy grail" leading indicator for future job growth when I took a thorough look over 2 years ago was real retail sales. Real retail sales tended to lead turning points in jobs by about 4 to 8 months. Since sales are still rising, we should expect continued job growth over the next few months as well. (This metric has also recently been touted by Prof. Karl Smith of UNC - Chapel Hill at Modeled Behavior).

I also found that over the last 40 years, the YoY% growth in real retail sales, divided by two, gave a reasonably close forecast to YoY% growth in jobs, at least over a longer horizon if not every month. Since real retail sales were averaging 6% YoY growth at the end of 2009, this led me to expect strong job growth in 2010. It didn't happen, although measuring by private jobs, the metric is at the moment almost in perfect alignment:



When we add government jobs into the mix, and compare real retail sales with total jobs (green), the metric still falls considerably short:



This is yet another indication of just how significant government job losses have been to the relatively poor jobs recovery. At the same time, because real retail sales are a leading indicator for jobs, this reinforces that we should expect to continue to see positive job growth in the economy, with private jobs at least being added at something like a 2% YoY rate.

4. Comparing initial jobless claims with jobs added:

In 2010 I thoroughly debunked the idea that we needed 400,000 or less in initial jobless claims to be consistent with job growth. It simply makes a lot of difference how deep the recession is, and also the pattern declining into a recession is quite different from the pattern during a recovery. I pointed out half a year ago that if we were to descend into a "double dip", I would expect to see a break in trend in the scatter graph comparing these two series, with a new trend line to the left of the recovery trend line developing. Here is the updated graph (using private jobs vs. all jobs to avoid the 2010 census distortions) , with the last 6 months' data in brown:



No break in trend happened. Since this scatter graph ends with October, it doesn't show the decline in the 4 week moving average below 400,000 in the last couple of weeks. Should that continue through the end of November, I would expect a very good November employment report, with something like 175,000 private jobs being added.

5. Okun's Law

Okun's law is actually a rule of thumb that holds that for every 2% YoY increase in GDP, there should be a 1% decline in the unemployment rate. Generally speaking, 2% YoY GDP growth equals no change in unemployment. A 4% GDP increase gives you a 1% decrease in unemployment. Contrarily a 0% YoY change in GDP gives you a 1% increase in unemployment.

I make use of a corollary, which is the YoY% growth in GDP minus 2% approximately equals the YoY% change in job growth 3 to 6 months later. Here is the graph of this relationship going back 65 years, and it has ominous implications:



Since 1948 there has never been a period of 2 or more quarters where YoY GDP% growth was under 2%, that has not equated actual YoY job losses in the next few months. If this relationship holds true now, then contra all of the other above data, we should have already been seeing outright job losses, and they could continue through the winter.

As I said, this contradicts virtually all of the previous indicators we have discussed. A possible explanation comes via Jeff Miller of A Dash of Insight, who informed us yesterday that the BLS's Dynamic Business Report of actual job data collected from the states showed that in the first quarter of this year only 250,000 jobs were created, rather than the 500,000 previously reported. If this revision is applied to all of the 2011, it would mean that the pathetic job gains of this past summer turn into outright significant losses. Not only would this tend to vindicate Okun's law, it would affect all of the data sets above. For example, the scatterplot graph above would probably then show that we did indeed break trend in the direction of a "double-dip."

6. Forecasts of the unemployment rate:

Finally, let's update a few metrics forecasting the unemployment rate. The premise here is that initial jobless claims are a leading indicator of the unemployment rate. The best way to measure initial claims, however, is to adjust for population, which is done in this first graph:



So adjusted, the recent initial claims levels aren't so bad. In fact, they are better than most readings during the last 50 years.

This metric had an excellent record for predicting the unemployment rate several months out -- until this recovery. It predicted an unemployment rate of under 7%, and needless to say were are far above that:



Taking a closer view of the last several years, it appears that the big disconnect occurred in 2009, when initial claims steeply declined, yet unemployment remained stubbornly high. Since then, the two series have tracked one another rather well. This suggests we should see the unemployment rate drop slightly to about 8.8% in the next few months:



Finally, here is a slightly different metric from Thumbcharts. This compares the last six month period with the same six month period one year before. In this longer term metric, initial claims also have an excellent record predicting the unemployment rate -- although like the metric above it shows that the YoY decline in initial claims considerably outpaced the decline in the unemployment rate a year ago:



This metric likewise predicts a continued decline in the unemployment rate over the next few months.

Summary

Continued job losses in government continue to have a depressing impact on job growth during this recovery, causing distinctly subpar growth compared with previous recoveries. Undoubtedly as I have pointed out just a few days ago, that housing until recently did not participate in the jobs recovery also has had an effect.

At the same time, most of the above metrics suggest that we should see continued job growth in the months ahead, and a continuing decline in the unemployment rate compared with a year ago. If present underlying economic trends continue (as to which there is obviously no guarantee), then by next summer or so we may see stronger job growth as the deficit in aggregate hours is completely made up.

The contrary indicator is Okun's law, which suggests we should already be in the throes of actual job losses. It is possible that we will find when the jobs data is revised that we did lose a significant number of jobs earlier this year, but that the situation will improve going forward from here, which would be more consistent with all of the data sets above.

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Expect a poor nonfarm payrolls report tomorrow

- by New Deal democrat

As I type this, the consensus is still for a payrolls gain of about +150,000 tomorrow. Based on the poor performance of initial jobless claims in the last month, I am expecting a considerably poorer report, on the order of only +50,000. I base this on the difference between how payrolls behave in the face of rising initial jobless claims vs. falling claims.

Below is an update of my scatter graph comparing initial jobless claims vs. nonfarm payrolls that I first ran several weeks ago. I included the deterioration in jobs leading up to and into the recession in red. Note how the red line traces a very different path than that of the recovery:



This is why I dismissed the straight line Prof. Delong drew at 400,000 jobs as the dividing point between job growth vs. losses. It simply makes a world of difference whether you are deteriorating into recession, or in recovery coming out of recession, leading to very different scatterplots as above (the same pattern is true for every other postwar recession).

But how should we expect jobs to behave in the face of seriously climbing initial claims? We only have one true example, of a double-dip, and that is the failed 1980 recovery turning into the 1981-82 recession. Here is the scatter graph for that double dip, showing the abortive recovery (blue) and the double-dip (red):



Even with the "summer stall" last year, where GDP only fell to +1.7%, nonfarm payrolls fell into and remained in 5-digit territory. Hence my expectation for tomorrow is that nonfarm payrolls retreat into 5 digits.

If that happens, watch Oil and see if it falls to a new post-April low. Only the real fear of a double-dip will cause the chokehold to loosen.

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The Jobs Report big picture in 5 graphs

- by New Deal democrat

On Friday I showed that the trend of increasing jobs reports was intact, when one bears in mind that for 12 of the last 13 months, the final revision was on average about +50,000 higher than the initial report. Even after the yearly benchmark changes that was still true for 9 of the twelve months of 2010.

Today let me update 5 graphs that I have been running over the last few months in some cases, and for over a year in others, to show some "big picture" correlations with the jobs report. All of these show data that has reliably led the jobs picture by weeks (the first graph) or months (the next two), or has led the unemployment rate by months (the last two).

First of all, here is the scatter graph of initial jobless claims (left) and monthly jobs gained/lost (bottom) for the last two years. Blue is all private jobs, red includes government jobs as well (except I have excluded the March through August 2010 period which was distorted by census hiring and firing):



As you can see, there is a nearly linear relationship. So long as initial claims continue under 400,000, we should expect robust monthly jobs reports (with a very big +/-125,000 variance, however). It is also important to note that we have been shedding government jobs for the entire two year period, without any "double-dip." While laying off government workers now is insane policy, and will be a drag on the economy, it is safe to say that it alone will not be enough now or during this summer to cause a renewed recession.

Next, let's look at jobs vs. GDP. This is a series I have been running for well over a year. Despite the complaints that GDP does not measure the happiness of Main Street, the fact remains that it is an excellent way to predict YoY jobs over the next 6-12 months. Subtract 2% from the YoY percentage growth of GDP, and you will be very close to the YoY% of jobs growth a few months later. Here is that graph now:



As you can see, it remains an excellent predictive tool.

Third, let's look at real retail sales vs. jobs. This is another series I have been running for well over a year. It is updated monthly, and so gives earlier signals of turning points than GDP. While it remains an excellent tool for the direction of YoY job growth, it has not performed so well in the last year:



My suspicion is that it is not performing so well this time around because the retail sales do not include those sales associated with new home sales and home improvements, compared with other recoveries. Nevertheless, if real retail sales continue to predict 3% annual job growth for an extended time, I expect job growth to trend in that direction.

In summary, the above graphs strongly suggest that we will continue to see jobs reports that at very least keep up with population growth in the coming three to six months.

Now let's look at two graphs comparing initial jobless claims with the unemployment rate. First, courtesy of Thumbcharts, is a graph comparing the average of the last last 6 months of initial claims (blue) and the unemployment rate (red) over the same period, with the equivalent 6 months the year before. With the exception of the double-dip 1980-1982 recessions, this has an excellent track record.



As the readings from last August and September disappear, the initial claims average will continue to decline YoY, and this predicts that there will continue to be a substantially lower unemployment rate than the same period a year ago. While this might not mean further decline in the unemployment rate from here, it very strongly argues against any significant increase back above 9% in that rate.

Finally, let's look at initial jobless claims as a percentage of the population vs. the unemployment rate. This is the graph I began running about 3 months ago when I was totally surprised by the close and long-lasting fit (although there has been a slight drift upward over the long term in the unemployment rate vs. claims):



This graph argued 3 months ago that the unemployment rate was far too high compared with initial claims. Since then the unemployment rate has declined 0.9%!!! As population-adjusted initial claims has consistently led the unemployment rate for almost 50 years, this graph suggests that further declines in the unemployment rate in the coming months are likely. If so, the dramatic drop in the unemployment rate could be the surprise economic story of 2011.

The question remains, however, how much of the decline in the unemployment rate is an unalloyed good and how much has to do with participants dropping out of the work force. I will get down into the weeds on that subject in my next post.

P.S. One note of final emphasis: I'm not just running the above graphs because of their performance in the past. Not infrequently in the last couple of years at DK I would get comments on the order of, "Pretty graphs. But they have nothing to do with reality. Everything sucks, and it's going to get worse." And yet, the "pretty graphs," which are just easy to digest representations of complex data, showing how A has relentlessly led to B over a very long time, have prevailed. If the pretty graphs kept kicking my ass, I would seriously reconsider my position. In summary, they still lead now, and are giving us a good look at what we should expect from the monthly jobs reports in the next few months.

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Inflection point number 1: Initial Jobless Claims

- by New Deal democrat

Last week I wrote that initial jobless claims was one of two series that appeared to be at inflection points. By that I meant that a small move in either one could result in the economy "turning a corner" - but in opposite directions.

This morning's report that Initial jobless claims were only 391,000 brings the 4 week moving average down to the lowest point since before the September 2008 meltdown: 402,000. A number of ~410,000 or less next week will bring this average under 400,000.

The inflection point is that such a number is consistent with average monthly job growth in excess of that necessary to keep up with population growth. It is also consistent with a continuing decline in the unemployment rate. In short, it represents an economy attempting to achieve escape velocity.

Here is an update of the weekly new claims for the last 3 months:

2010-11-20 410000
2010-11-27 438000
2010-12-04 423000
2010-12-11 423000
2010-12-18 420000
2010-12-25 391000
2011-01-01 411000
2011-01-08 447000
2011-01-15 403000
2011-01-22 457000
2011-01-29 419000
2011-02-05 385000
2011-02-12 413000
2011-02-19 391000

With the exception of the two post-January storm outliers, in the last two months every single week has been under 420,000. And now we have had 2 numbers under 400,000 in the last 3 weeks.

This is good news - or at least pretty close.

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Initial Jobless Claims vs. Payrolls -- where to next?

- by New Deal democrat

Fourteen months ago, I wrote that

Some time ago, Prof. Brad DeLong of Berkeley, thinking aloud with graph, drew a line across the 1991 and 2001 recessions and recoveries, making a "note to self" that it appeared that Initial Jobless Claims post those recessions had to decline to 400,000 or less before payroll jobs were added. Thus, mused Prof. DeLong, it must be so as well, post this "Great Recession." This "note to self" was subsequently repeated by Bill McBride at Calculated Risk, from which it has now been picked up and repeated at Prof. James Hamilton's site, Econbrowser....

IT IS WRONG.
....
I am utterly confident that there will be job growth long before jobless claims fall to 400,000.

Well, we know how that turned out, enabling me to do a little victory dance in March.

With initial claims finally falling below 440,000 in three of the last four weeks, on Friday I posted this graph, showing initial jobless claims in blue, left scale, and private nonfarm payrolls, inverted, in red, right scale :



Over the weekend, I decided to take a little more sophisticated look at what might be in store if jobless claims are truly breaking out to the downside, and continue to decline to 400,000 or even less, which seems increasingly likely as real retail sales in the last four months have grown at a rate of 10% annualized.

Exactly as I did in my analysis last year, I am comparing this jobs recovery against the job recoveries from the two least severe recessions (1974 and 1982) and using that as the template.

Here is a scatter graph comparing the decline in initial jobless claims from peak to trough (y axis) following the 1974 recession with nonfarm payrolls (x axis):



Here is the same scatter graph for the jobs recovery from the peak of the 1982 recession (note I have deleted two months in 1983 where a strike caused a loss of 1 million jobs in one month and a similar gain the next when the strike ended):



Here is the same graph for our jobs recovery so far (note I am using private jobs only to eliminate distortions due to the census):



Putting the three jobs recoveries together, here is the scatter graph we get:



Focusing on that part of the graph that only shows the correlation of payrolls for jobless claims under 450,000 gives us this:



While I don't have the software to do this scientifically, the trend line averaging the data from the three jobs recoveries is probably very close to the curved trend line I have drawn in light green:



This suggests that at a monthly average of 440,000 initial jobless claims a week, the average monthly payrolls gain is about 175,000 to 200,000, and gradually increases as initial jobless claims decrease. But there is an awful lot of variance, so that - as the graph immediately above the last one shows - at until such time as jobless claims drop below 360,000, even excepting a few outliers, any given month may give a number as low as ~75,000 or as high as ~350,000.

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