What to avoid
The initial unemployment claims numbers are out for the week and what we need to avoid is what all the newspapers are doing. That is, they’re doing what we shouldn’t:
First-time claims for unemployment benefits totaled 840,000 last week, higher than expected in another sign that the spike in job growth over the summer has cooled heading into the final part of the year.
Firstly, they’re concentrating upon the initial claims numbers which isn’t the interesting bit at all and secondly what they’ve said doesn’t even make sense. Initial claims is the number of people who have just lost a job so it actually has nothing at all to do with job growth. That, obviously, being a function of how many people get jobs, not lose them.
The number of Americans applying for initial unemployment benefits ticked down to a post pandemic low of 840,000 last week, but remained at levels indicating that the recovery in the labor market is losing momentum as the coronavirus pandemic lingers.
Nope, it’s not telling us anything about the momentum of the labour market.
The number of Americans filing for unemployment benefits edged lower last week in a modestly encouraging sign for the labor market’s prolonged recovery.
Really, no. How many start to claim is vaguely interesting but it’s not determinative of anything and it’s only vaguely interesting.
Please do note I’m not particularly snarling at these outlets they’re just the first three that came up on a news search. This is how people really are thinking about these numbers.
The economics here
Yes, OK, the number of people being laid off each week is sorta interesting. If it jumped – as it did recently – to tens of millions then at least an eyebrow would be raised.
But within economics we really do have to keep making that distinction between a stock and a flow. Income is, for example, a flow, wealth is a stock. GDP is a flow. The P&L of a company is the flows through it, the balance sheet is the stock position. It’s an important difference.
Initial claims is a flow. It’s the flow of people into that state of unemployment. This in itself is neither good nor bad. We can certainly say that it never happening would be bad for it would imply an entirely static economy. We could even, at a stretch, claim that a high rate was good as it indicates rapid change. But that flow proves nothing in and of itself. What we also want to know is the flow out of unemployment into employment.
The easiest – or most frequent perhaps – method of measuring this is to look at the stock of unemployment. Or, in the jargon here, continuing claims. This isn’t perfect either because there are various different measures of how many unemployed there are. U3 is the one that’s usual but others like U6 include many more including those not really looking but who would work if someone came and dragged them into the factory (I jest and exaggerate but not by much). While not perfect U3 is still properly indicative of what we want to know.
Not how many are entering unemployment as a guide to the lost capacity in the economy but how many are in unemployment as that guide? Fortunately we get this information from the same weekly report.
We have this week’s numbers:
The advance number of actual initial claims under state programs, unadjusted, totaled 804,307 in the week ending October 3, an increase of 5,312
OK, that’s the bit I say isn’t important:
The advance unadjusted insured unemployment rate was 7.3 percent during the week ending September 26, a decrease of 0.7 percentage point from the prior week. The advance unadjusted number for persons claiming UI benefits in state programs totaled 10,612,021, a decrease of 1,010,280 (or -8.7 percent) from the preceding week
That’s the bit I say is important.
(Unemployment from Dept of Labor)
That’s not doing badly you know. To give it a bit more perspective over time:
(Unemployment rate from FRED)
Note that this chart includes only the monthly figures so the latest number is 7.9%, not the 7.3% of this latest weekly report (also, the FRED chart is seasonally adjusted).
This is not to make a political point, just a comparison one, the unemployment rate is now lower than it was all the way through President Obama’s first term in office. As a reduction from the highest unemployment rate since the Great Depression that’s not bad for a bounce back.
If we look at the numbers rather than the rate the story is similar although there we’ve got to be careful to correct for a rising population.
When we talk about macroeconomics – and thus the influence of the economy on stock prices – it is that unemployment number that matters, not the initial claims one. Because it’s the stock of unemployment that does, not the number entering the state. Whether there’s to be more stimulus, a change in interest rates, even how much production and GDP is being lost, these depend upon that stock, not the flow.
Thus that’s the number we should be taking note of here. And, as is quite obvious, that’s the number that is moving in the correct direction really rather swiftly.
Yes, I agree, as people keep telling me, there could be horrors right around the corner. Further outbreaks and lockdowns. It’s entirely possible for the recovery to run out of steam. Who knows what electoral politics is going to do?
But working with the actual numbers we’ve got about the economy we’re trying to discuss, we seem to be doing really rather well. Unemployment down by over half a percent in a week? Sure, of course that’s not going to continue, the very best that is even conceivable is an asymptotic approach to where we were in February. And yet it’s still an impressive recovery.
At some point in this decline in unemployment we’re going to have to agree that the problem is largely over. Quite where we do say that is a matter of taste but I’d regard 6% or so being about where we would have to say the bounce back is over. That last 2% or so back to full employment is going to be much more difficult. I’m also not going to say that we’re going to get to 6% in the next three weeks, this rate isn’t going to last that long. Or, perhaps, I’d be astonished if it did.
But I’ve long been saying that I expect a swift bounce back a V shaped recovery. And here taking unemployment as our measure that is what seems to be happening. At least, we’re not seeing evidence – as opposed to stories or worries – against my contention as yet.
The investor view
I think actual economic news is probably a bit passe as an influence on market prices right now. We’ve a month to the election and that’s what will be driving prices, changes in views over who is going to win what. Sure, macroeconomic news will sway a few votes either way but many fewer than you might think.
However, even given that, economic truth will out into prices at some point. And that truth right now is that the V shaped recovery proceeds apace. All of which supports current market prices as that’s what they’re assuming.
Politics might take precedence for the next few weeks but absent that we’ve no news leading to a likely major repricing.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.