We have long highlighted initial jobless claims as one of our favorite leading indicators for a potential turn in the business cycle. Happily, initial claims rest near multidecade lows, a reflection of the tight labor market and a sign that, despite heightened policy uncertainty, companies have not yet resorted to layoffs at a macro level. With risks to the economy on the rise, we are watching initial claims even more closely in the second half of the year.
The labor market remains strong, a critical support for household consumption and, therefore, the economy. In the first half of the year, payroll employment showed some volatility and averaged 164,000 new jobs per month. This is a modest slowdown from the 223,000 pace of job creation in 2018, but nevertheless continues a record-setting run of 104 consecutive months of positive job reports. The unemployment rate was 3.6% in May, the lowest since 1969.
Concern about the economy and policy uncertainty related to trade is showing through in the business sentiment indicators, however. The ISM recently fell to a 30-month low of 52.1. Cautious sentiment can turn into caution in practice, which could translate into slower hiring or even layoffs. Historically, rising layoffs have had an immediate and negative impact on household spending, which could cause slowing U.S. growth to grind to a standstill, or even reverse.
Initial claims for unemployment insurance, when a worker applies for state-sponsored unemployment benefits, typically bottoms 9–24 months before a recession begins. A 20% increase in initial claims over an 8-week period would be a clear warning sign that broad-based uncertainty is causing companies to increase layoffs. Should claims rise to 275,000 over several months, we would become more pessimistic about our growth outlook.
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