With the large increase in Google searches for “unemployment” over the last week, Thursday morning’s report on initial claims will be an important first indicator of how the COVID-19 pandemic is beginning to impact the US labor force. While the data will only run through last Saturday and not fully capture the recent fallout from the virus, it’s a start. And remember, it is not cumulative, but rather a weekly snapshot of every new filing for unemployment insurance payments.
With that, we thought it would be helpful to look at the pace of increase in initial claims during the 2008 Financial Crisis as a potential tell for what the current ramp could look like and if it’s helpful in the search for an investable bottom in stocks. A few points:
- The most recent data for initial claims has been running at around 220,000/week.
- During the Financial Crisis, initial claims started spiking in July 2008. They had already been drifting higher as the US housing market started to cool. But on Saturday, July 5th 2008 there were 371k claims the prior week and over the next month that rose to 448k for the week ending August 2nd.
- The peak only came 7-8 months later at 665k on March 28th, 2009, as the following chart shows:
Our main takeaways from this data: the market bottomed on March 9th, 2009 or less than 3 weeks before the level of initial claims peaked. Additionally, the American Recovery and Reinvestment Act (ARRA) – the central fiscal stimulus package to ease the economic pain of the Financial Crisis – passed Congress one month earlier in February 2009. That’s why the right size and scope of a fiscal stimulus package is key to stabilizing both the US economy and equity markets during the current COVID-19 crisis.
Separately, we also review the Job Openings and Labor Turnover Survey (JOLTS) when it is out each month such as today. Even though it is one month delayed, it gives much more granular detail than the headline numbers from the Employment Situation Report. Given that the most recent data is from January, it will also provide a baseline of how strong the US labor market was going into the COVID-19 pandemic which started coming into full force in February.
Here are our key takeaways from the latest edition of JOLTS. Just note that while most commentators look at the levels of each data point in the report, we always adjust it for the size of the US labor force so we can compare current data to prior cycles.
#1: Job Openings as a percentage of the labor force rose to 4.23% in January 2020 compared to the record high of 4.62% in November 2018.
- The rate of job openings as a percentage of the labor force still exceeds levels reached in the last two economic cycles, but has been rolling over since 2018.
- This latest move higher is therefore a welcomed development, as it is an early indicator of trouble in the labor market. Employers typically withdraw job listings before they start laying off workers. That said, we expect job openings to start turning lower again in the coming months for most industries – other than health care, of course – given layoffs from the economic impact of COVID-19.
- What is also most alarming here is that job openings have outnumbered unemployed workers for 23 straight months and by back over +1 million this past January. Prior to January 2018, unemployed workers always surpassed job openings since the start of the series in December 2000. This disparity highlights employers’ ongoing difficulty of finding qualified workers.
#2: Hires as a percentage of the labor force slipped to 3.54% in January versus the post-recession high of 3.69% in April 2019.
- The current rate remains around levels reached in the last cycle, but below the high of 3.68% in July 2006.
- In the prior cycle, hires as a percentage of the workforce hovered around 3.5% until turning lower when the market peaked in the fall of 2007.
#3: Quits as a percentage of the workforce edged up to 2.15% in January compared to the post-recession high of 2.21% in July 2019.
- Quits as a percentage of the labor force still bests the high of 2.03% in September 2005 during the last cycle, which occurred long before the market’s peak in October 2007.
- Looking ahead, quits as a percentage of the labor force in the last cycle chopped around the 2% threshold until turning lower during the fall of 2007 when the market topped out.
- This is an especially important data point since workers do not tend to voluntarily leave their job unless they have already secured a higher paying/better position. That’s why it was former Fed Chair Janet Yellen’s reportedly favorite measure of the US labor market because it reflects economic confidence.
#4: Layoffs and discharges as a percentage of the labor force dropped to 1.02% as of January, close to the current cycle low of 1.00% in September 2016. In the prior cycle, it bottomed at 1.16% in December 2006 and reached a high of 1.72% in April 2009.
#5: Our “Take This Job and Shove It” indicator, or quits to total separations, rose to 62.9% in January compared to the record high of 63.5% in March 2019. This was due to a rise in quits and fall in layoffs and discharges, an ideal combination.
Bottom line: at least the latest JOLTS report shows the US labor force was in solid shape heading into the COVID-19 pandemic, but this data will likely unwind quickly in the coming months. We will look to the jobless claims data in the meantime to gauge by how much.