Economics & Growth | Monetary Policy & Inflation | US
Weekly initial unemployment benefit claims garner much market attention yet say little about unemployment (Table 1). They only capture regular state-provided unemployment benefits and form a small share of continuing claims. Furthermore, they last only 26 weeks on average, and an increasing number of unemployed are now exhausting state benefits and moving onto federal unemployment programs.
The CARES Act has funded two programs to supplement state benefits: Pandemic Emergency Unemployment Claims (PEUC) and Pandemic Unemployment Assistance (PUA). But the latter is unconnected to past unemployment contributions (‘non-contributory’ in economist jargon). So it’s more akin to a social welfare payment than social insurance. In other words, PUA claims are only loosely linked to actual unemployment, and we can ignore them in our estimates of this. Doing so, in mid-October claimants under the state programs represented only about two thirds of total claimants.
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Summary
- Weekly claims are falling because benefits are expiring, not because workers are finding jobs.
- Together with slower employment growth, this suggests stagnant participation and limited upside to labour income
- Meanwhile, tight election results suggest limited fiscal stimulus, if any, before end-year.
- In this context, a stagnant participation rate adds to negative Q4 growth risks.
Market Implications
- Medium term – Yields could fall further as the signs of a double-dip recession mount and as a Fed backstop contains issuance risks. This needn’t be dollar negative as the seasonal increase in COVID-19 cases is a global phenomenon.
Initial Claims Convey Limited Labour Market Information
Weekly initial unemployment benefit claims garner much market attention yet say little about unemployment (Table 1). They only capture regular state-provided unemployment benefits and form a small share of continuing claims. Furthermore, they last only 26 weeks on average, and an increasing number of unemployed are now exhausting state benefits and moving onto federal unemployment programs.
The CARES Act has funded two programs to supplement state benefits: Pandemic Emergency Unemployment Claims (PEUC) and Pandemic Unemployment Assistance (PUA). But the latter is unconnected to past unemployment contributions (‘non-contributory’ in economist jargon). So it’s more akin to a social welfare payment than social insurance. In other words, PUA claims are only loosely linked to actual unemployment, and we can ignore them in our estimates of this. Doing so, in mid-October claimants under the state programs represented only about two thirds of total claimants.
Change in Total Claims Better Overall Unemployment Indicator
Before the pandemic, the number of unemployed in the monthly household survey (used to compute the unemployment rate in the monthly labour data) was about 4mn above the total claimants in the regular state unemployment insurance systems. The difference reflected those unemployed who failed to qualify for benefits. Since the pandemic, by contrast, the unemployed in the household survey have fallen below the total number of unemployment benefit claimants (excluding PUA).
This likely reflects the loosening of eligibility criteria. Through COVID-related laws voted in earlier this year, the federal government has allowed states to relax eligibility if they wish. This is shown by the fact that U5 (a broader unemployment measure including discouraged and marginally attached workers) tracks benefit claimants more closely than the narrower U3 unemployment, the headline number released with the NFP. On a rate of change basis, however, U3, U5 and claims numbers tend to track closely.
Expected Slower Employment Growth Implies Further Participation Fall
October employment data confirms the correlation between changes in total claims, U3 and U5. Furthermore they show that, while participation has improved mom it remains well below pre-pandemic levels. Such a decline could weaken labour income and the economy’s ability to continue growing without further fiscal stimulus (Can the US recovery Continue Without New Relief?, 23 September 2020).
Meanwhile, tight election results suggest limited fiscal stimulus, if any, before end-year (The US Presidential Election: Possible Outcomes and Market Implications, 29 October 2020). In this context, a lower participation rate adds to the risk of negative Q4 growth.
Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)