As economic indicators fluctuate, it’s crucial to monitor patterns that are signalling the possibility of an upcoming recession. One such indicator is the trend in initial jobless claims. Historically, rising initial jobless claims have preceded every recession in the United States. With recent data showing an increase, it’s worth examining whether this could be an early warning of a downturn.
Initial Jobless Claims as Recession Indicators
In the months before the financial crisis, initial jobless claims in the US began to trend higher. This pattern was also observed before the 2001 recession and the 1990 recession. Rising initial jobless claims have consistently preceded every single recession in US history. This makes them a crucial indicator to watch when assessing the health of the economy.
Recent Trends in Initial Jobless Claims
Over the past few months, initial jobless claims have started to trend higher again. In January 2024, the US saw jobless claims at 190,000, one of the lowest levels in history. However, this number has since climbed to 240,000—a 20% increase in a short period. This rise raises concerns about the potential for an economic slowdown.
Is Every Rise in Jobless Claims a Cause for Concern?
While there are instances in history where jobless claims rose without leading to a recession, substantial increases typically do not bode well for the stock market. Historically, every significant rise in jobless claims has coincided with a 20%+ decline in the stock market, with the sole exception being 1979.
Current Evidence Suggesting a Downturn
Several factors suggest that the current rise in jobless claims could be a precursor to a recession. Firstly, the number of people finding jobs plentiful in the economy has been declining over the last year. This trend is typically observed in the year or so before almost every recession in the past 40 years.
Additionally, there has been an increase in the number of people reporting that jobs are hard to find, another common pre-recession indicator.
The Yield Curve: A Notorious Recession Signal
The yield curve, a well-known recession signal, has been inverted for the longest period since 1929. This inversion has historically predicted every downturn in recent financial history and accurately reflects the state of the labor market.
When the yield curve flattens, it usually indicates a strengthening labor market and declining jobless claims. Conversely, after yield curve inversions, the curve steepens, typically indicating a weakening labor market and rising jobless claims.
Current Yield Curve Trends
With the yield curve currently inverted for an extended period, the bias is towards initial claims rising substantially over the next few months. However, predicting a recession solely based on rising jobless claims and an inverted yield curve is not straightforward.
Recently, the yield curve hasn’t been steepening and flashing a recession warning signal as it usually does before a downturn, despite the rise in initial jobless claims. This pattern was also seen in the last three recessions, where the yield curve stayed flat even as jobless claims rose.
The Disconnect Between the Economy and Financial Markets
There’s often a disconnect between the economy and financial markets. This early phase before a downturn is where financial markets typically still rise, despite rising jobless claims. For instance, between January 2006 and October 2007, jobless claims rose while the S&P 500 climbed 30%. A similar pattern was observed from October 1988 to January 1990, with the S&P 500 rallying 30% before the recession started and the market eventually dropped by 20%.
Since January 2024, we’ve seen a similar pattern, with this phenomenon occurring for 170 days. If history repeats, we could still see a rising stock market with rising claims for another 100 days, or around three months.
Riding the Bull Market
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Conclusion
Rising initial jobless claims have historically been a reliable indicator of impending recessions. While recent trends suggest an increase, it’s essential to consider other factors such as the yield curve and labor market conditions. Despite these warning signs, financial markets often continue to rise in the early phases before a downturn eventually unfolds. Understanding these patterns can help investors navigate the market and make informed decisions during uncertain times. Click here to sign up! Subscribe to our YouTube channel and Follow us on Twitter for more updates!
