Claims Volatility Bears Watching

Today’s increase in claims to 286k from 230k last week and against 225k expected bears watching for the following reasons:

1. Initial claims had moved to pre-pandemic levels, about 200k+ since Nov. Today’s increase is large and unexpected. The Z score, based on 2018-19 data, is above 8.
2. Claims are an unusually important labor market indicator this time around because firms fired “too many” workers in 2020: in a downturn typically, firms keep more workers than they need and hours worked and labor productivity go down. This is because hiring back workers is costly. This time around firms did not retain any surplus workers and instead increased hours worked, which increased labor productivity and firms profit margins see charts. Firms are now struggling to hire back workers at wages they are able or willing to afford. This is shown e.g., by historically high ratio of vacancies per unemployed and historically very low ratio of actual hires to advertised vacancies. Basically, mom and pop corner shops cannot afford the $20 starting wage offered by Amazon see chart.

3. In this context firms facing a downturn are more likely to slow new hires than to fire workers. That is initial claims are more sensitive to labor market trends than in a typical full employment labor market.
4. The raise in claims is no doubt in part Omicron related but may not reverse as quickly as new covid cases currently are (see Chart 4). This is because consumption accounts for 70% of US growth and consumption is driven by labor income now that government transfers have ended. Real wages have been flat and therefore real household labor income is currently driven by employment growth. So, the risk is that omicron drives a decline in real household income that in turns drives a decline in real household consumption that drives a decline in employment and so on and so forth. The cycle could repeat and send the economy on a faster down trend.

5. The next NFP is on Feb 4 i.e., we have 2 more weeks of claims. If the uptrend in claims persists, I will be looking for a fall in Jan payrolls.

That said the usual data caveat applies: the numbers are volatile and January seasonality is always tricky. So, at this stage I am watching closely rather than drawing conclusions.

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.

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