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Summary
- Recently higher jobless claims do not announce a recession as:
- They reflect residual seasonality.
- The insured unemployment rate has remained flat.
- Neither the distribution of unemployment spells nor flows into unemployment are consistent with a recession.
Market Implications
- I continue to expect no cut in 2024 against 1.9 cuts currently priced in.
Higher Claims Reflect Residual Seasonality
The recent increase in unemployment claims has led many to conclude that the economy is headed into recession. I disagree for four reasons.
First, claims are volatile. Claims increased last summer, but this was a false alert (Chart 1). Relative to a year ago, initial claims are falling and continuing claims are unchanged (Chart 2).
The Insured Unemployment Rate Is Flat
While total unemployment has been rising, the insured unemployment rate has remained flat. All of the increase has been in uninsured unemployment (unemployment of workers who have not been contributing to unemployment insurance long enough to qualify for benefits). This would fit the profile of recent migrants (Chart 3).
Distribution of Unemployment Spells Does Not Signal Recession
The skew in the distribution of unemployment duration does not signal a recession. Median unemployment duration is below the average because most unemployed stay unemployed for a short period – i.e., the distribution of unemployment spells is skewed to the left (Chart 4). The skew rises during a recession because large inflows of newly unemployed initially move the distribution of spells to the left. But as can be seen on chart 4 this time around the skew has been flat.
It looks like the increased unemployment is less from higher inflows of newly unemployed and more from longer spells (Chart 4). This would be consistent with a mismatch between low-skill migrants and demand for skilled workers.
Unemployment Flows Do Not Signal Recession
Chart 5 also shows flows into unemployment do not resemble previous recessions (the labour force flows data is only available since 1990). Previously, flows from not-in-labour force (neither employed nor looking for a job) to unemployment fell before recessions because the slowdown in labour demand made finding a job more challenging so fewer workers looked for one. This time, the not-in-labour force to unemployed flows have been stable.
In addition, in previous recessions, the peak/trough in employed to unemployed/unemployed to unemployed took place 1-3 quarters/4-5 quarters before the start of the recession. This time, the peak/trough were in August 2022, but since then growth has been accelerating rather than slowing!
Overall, the unemployment flows paint the picture of a labour market that is normalizing following an exceptionally strong recovery rather than that of a labour market headed to recession.
Market Consequences
I continue to expect no cut in 2024 against the markets currently pricing 1.9.
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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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