Job Market Forecasting Depression

Following up on our last post, "Markets Will Crash With or Without the Federal Reserve," we reiterate the importance of the labor cycle, as indicated by initial claims data, in foreshadowing the future of economic growth and stock market results.

Initial claims are currently at historic lows as a percent of the labor force and as a percent of the population. As claims revert to typical business cycle highs, a lot of bad things will happen in the economy and markets.

Initial claims have never been this low as a percent of labor force.

The initial claims data set is not the only indicator we can rely on for forecasting the macro driven movements in markets and the unraveling or recovering of the economy. Currently, claims is particularly important given the extremity of current levels. Plus, as we observe claims alongside a preponderance (yeah, preponderance) of other data, calling the end of the current business cycle gets easier and easier, in probabilistic terms. The recession could be this year or next. Perhaps, the government won't call it a recession. The markets will. In fact, the yield on the 10-year treasury bond and the 1-year return of the Russell 2000, are both already starting to call it as we see it. Sub 2% on the ten-year bond. Russell 2000 -15%. Lick your bear chops. Not only are weekly released claims data hinting at a problem, but the daily and minute by minute market price data are clarifying the hard reality of where we are in the current cycle. 

The 10-year bond yield is crashing, while year-over-year claim declines are slowing.

And, Mr. Russell 2000? Yep, crashing too.

This will get ugly.

It is clear, to even the dumbest wall streeters among us at this point, that the industrial/manufacturing economy is in full-on recession mode. Good paying jobs come from this segment of the economy. Industrial economic activity is under stress as the weakness of our trading partners pervades the trade-related-goods-producing businesses. The domestic energy business and its supplier network are both in recession. Again, typically good paying jobs in these industries, especially for people with limited intellectual skill sets who are willing to work hard.

The weakness of our trading partners and of the energy market form the story behind the data. Regardless of the story you want to tell (perhaps it's just time and the cycle), the data is clear; the manufacturing PMI is in contraction (AKA recession) and the labor market is just beginning to reflect it. The bulk of the pain is still ahead.

Manufacturing ISM and Initial Claim data fit like a glove, historically.

We expect a continued downtrend in the manufacturing PMI, which will perpetuate higher jobless numbers and vice versa. Yes, vice versa; these relationships often turn bi-directional and the moves become exaggerated. 

Personal consumption expenditures (PCE) are shown below tracking along with initial claims throughout history. Again, this relationship indicates the importance of modeling initial claims data. The combination of these two indicators also illuminates the slowing of growth and the end of a cycle. Of course, consumption is the biggest component of GDP in the US.

Consumption growth has peaked and continues to slow. As the change in claims turns positive year-over-year, the consumption economy will worsen.

From the current extreme lows, initial jobless claims are likely to spike higher within a time horizon you can count in months and perhaps even weeks. Multiple real-time market and high-frequency economic data sets continue to indicate a slowdown that is on the verge of contraction. This spells doom for the stock market and the economic expansion investors and working citizens have benefited from over the last six years or so until now.