There Is No Recession In Sight

Strong Jobless Claims

The jobless claims report was strong again as claims fell from 219,000 to 213,000. Quite frankly, if you asked economists 3 years ago if such a report was possible, most would have said “no”. This cycle has seen record lows in the ratio between the labor force and the jobless claims. The August claims are a few thousand above the cycle low in July. I think comparing the trough in this cycle to current claims is similar to looking at the recent changes to the Q3 earnings estimates.

To be clear, both stats were amazing, which means it’s tough to improve upon them. Earnings growth estimates usually fall heading into the quarter, but they have been rising this year. A slight increase in the amazing Q3 estimates is worth applauding. The trough in the jobless claims can be considered a recession indicator. However, if the claims stay near where they are now, there doesn’t need to be a new low for me to discount the possibility of a recession.

Recession Timing Indicators

The point about using the trough in the jobless claims as a recession indicator was made because the table below looks at the troughs in a few indicators to determine the current recession risk. The S&P 500 and unemployment claims are in the leading indicator series, so there is some overlap in those metrics.

Jobless Claims

First, let’s look at the unemployment claims. To be clear, the data used in this table is the 4-week moving average. As you can see, the 4-week moving average of the unemployment claims bottoms an average of 12 months before recessions when you look at the past 7 cycles. The last bottom was May 12th which was 3 months ago. However, don’t think that the economy is about to go into a recession in 9 months.

The 4-week average was 213,500 on May 12th and is 214,250 now. It’s spurious to worry about a recession based on a 750 difference in the 4- week average unemployment claims. While quantitative data is important, let’s not lose sight of reality. A 750 difference is like the difference between a 420 foot home run and a 418.5 foot home run. It is immaterial. If the past data is revised in the next report, this could be a new low. Also, another strong report next week could cause there to be a new low.