Why Unemployment Is About To Surge
Unemployment is potentially set to rise sharply in the coming months. That is a pretty bold claim on the surface and one that flies in the face of both mainstream economists, and the White House which is about to unveil a new "jobs plan".
Let's take a quick look at some numbers: 8, 160, 400, 350, 12 and 5. There have only been 8 weeks out of last 160 weeks that unemployment claims have been below 400 thousand claims. In normal circumstances we are worried about recessions when claims are rising above 350 thousand claims. Furthermore, jobless claims tend to plunge below 350 thousand a week within 12 months after the end of a recession. Currently we are still holding above 400 thousand claims after more than two full years since the recession statistically ended.
Those are some pretty ugly numbers, but the most important number is 5. The reason that we think unemployment might move sharply higher is that every time the STA Composite Employment Index drops to a level of 5 or less the economy has been in a recession. Of course, it is during recessions that unemployment claims rise sharply as businesses cut back on their labor force to reduce costs. This is clearly seen in the chart.
(Geeks Note: The STA Composite Employment Index is an average weighted index of the employment components of the Chicago Fed National Activity Index, seven different regional Federal Reserve manufactuing indexes, and the National Federation of Independent Business survey.)
It is not just the composite employment indicator that is causing concerns - it is the market itself. The S&P 500, when inverted, has a very high correlation to the level of jobless claims. The exception was the summer of 2010 where the market declined but jobless claims didn't rise sharply. This was due to the introduction of QE2 which staved off an impending recession. However, on average sharp declines in the market, especially in advance of recessions, lead to sharp rises in unemployment claims.
With the economy chugging along at 1% currently, and most likely lower by the final revision, manufacturing indexes either in or moving towards contractionary levels, housing still under stress, corporate profits coming under pressure and Europe in complete disarray; there are plenty of catalysts to push the economy off a very narrow ledge.
So, while the Administration is rolling out a new "job recovery plan" in the coming days - the indicators may already be saying that it is a plan that is too late in coming.