INSIGHTS

On May 14, 2018

AAM Viewpoints – Initial Claims and the Continuing Expansion

Rate volatility has continued in earnest. A nearly 100bps (basis point) increase in 10-year yields since September 2017, the volatility spike in the equity markets in February of this year and FOMC (Federal Open Market Committee) rate pressures has some of our clients explicitly expressing concern for how to prepare for the “doom and gloom” which is certain to befall us. We turn on the TV or peruse the internet and find some of the financial media in frenzied preoccupation with the reappearance of volatility. They gnash their teeth publicly and wring their hands daily. As a result, our conversations tend to be focused on addressing fear and reassuring that risk – both credit and interest rate – are more than simply an on/off switch.

Our exposure to selected assets and rates are not wholesale changes made in response to a single event. We are not positioning assets for where we are at present, but rather we are positioning them for where we expect them to be. Investing is a process of wealth accumulation more nuanced in practice than is communicated in the news; and so below is a short discussion of how we dig deeper into economic data and as a result remain confident of our outlook.

When surveying economic data throughout each month, there are a few select macroeconomic indicators that we pay more attention to than others. We gravitate toward various data because it provides insight into future economic activity because of its historic veracity. Weekly initial jobless claims are an example of these characteristics.

Initial jobless claims are released each Thursday for the prior week and the report aggregates first-time applications for unemployment benefits at the state level. The report is based upon a robust set of data which began being compiled by the Department of Labor (DOL) in 1967 and as it is collected from state agencies, the DOL estimates the report covers approximately 98% of the total nonfarm workforce. While initial claims tend to garner the bulk of the attention, the report also includes information on continuing jobless claims for benefits during the period ending approximately 12 days prior to the report.

A long track record of the data, the lack of major revisions and the data’s comprehensive nature make it one of the most relevant data sets for cyclical business and labor analysis. The Initial Claims report also is reputable enough to be included as one of the 10 indicators in the Conference Board’s Leading Economic Index.

As can be seen in the associated Initial Claims chart, initial claims decline during periods economic expansion then begin increasing approximately 13 months prior to the onset of a recession. Initial claims climb, on average, 29% from their earlier lows prior to the official onset of a recession and, as mentioned earlier, this begins at least a year prior to the beginning of a recession.

Recently, the decline in initial claims has been dramatic with recent claims reaching their lowest level since 1969. Other recent labor-related data such as Job Openings and Quit Rate confirm the continuing robustness of the current labor markets that initial claims seems to suggest.

While the weekly levels of the Initial Jobless Claims report continue to show strength, we feel it is also appropriate to adjust claims to reflect broad labor force changes over time.

The chart at the left illustrates that as the U.S. economy entered recession in December 1970, the civilian labor force was 81.98 million while initial claims began to rise from 0.26% of the labor force at that time. Today, we see that the labor force has more than doubled to 161.12 million though claims continue to decline to 0.137% of the labor force.

It is true that for all the hiring that continues to occur, wages are growing at a tepid 2.7% over last year and the bloom appears to be off the rose when reviewing the number of jobs added on the monthly basis. It is also clear that the FOMC will likely raise rates once or twice more in 2018 and that pressure on the yield curve has the potential to drive it flatter.

While these topics certainly make important headlines, our investing strategies derive performance by considering more than headlines and we feel the data supports our expectation that continued economic strength will continue to drive hiring. We see no evidence of a turnaround in initial claims. We expect it will happen but until the data begins to clearly indicate weakness, our guidance to our clients continues to be that we will manage to their objectives and our outlook.

There is clear evidence that businesses continue to hire. It is true that businesses may be hiring from the margins or they may be hiring from a still sizeable pool of part-time labor, but the fact remains that hiring continues. Initial Jobless Claims continue to show cyclical strength. The history of the data when coupled with a view of the yield curve across the breadth of business expansions continues to make us optimistic for the next 12-18 months. Our guidance to our clients continues to be that we will manage to their objectives and not to the headlines.

CRN: 2018-0507-6653R