U.S. equity markets ended August higher after largely erasing the S&P 500 Index’s 8.5% selloff that began in late July and crested in early August. The turbulence was ignited as a growth scare emerged following a soft jobs report and fears of contagion emanating from an unwind of the Japanese yen carry trade. A rebound began following a favorable initial jobless claims release on August 8 that showed the labor market was likely not deteriorating as rapidly as had been feared, bolstering the prospects of a soft landing.
The second half of August saw a continuation of largely favorable data releases, including additional jobless claims reports that helped markets advance despite a few hiccups and an August jobs report that showed a bit of a bounce back in hiring. The action of the last few months could be broadly described as “two steps forward, one step back” for both financial markets and the economy. Jobless claims is the latest signal to show resilience, supporting the notion of a slowing but still healthy labor market.
In recent years, we have referred to initial jobless claims as our economic “canary in the coal mine” as it gives us a weekly real-time look into the health of the labor market that is not materially revised historically. Initial jobless claims measure the number of people filing for unemployment benefits in any given week, and the number of first-time filers (initial claims) provides insight into the number of layoffs occurring. An increasing number of layoffs bodes poorly for future consumer spending as labor income is the primary source of spending power for the typical American. Consumption can also suffer as a layoff cycle builds even among those who do not lose their jobs, which typically shows up as a dent to consumer confidence and general consumer retrenchment.
Jobless Claims Remain Under Control
All of this is part of the reason why initial claims are one of the heaviest-weighted indicators in our assessment of the economy. Specifically, we focus on the change in claims relative to recent trends to try and identify inflection points. Claims worsened last summer when they appeared to be breaking out to the upside, although the indicator never hit a danger zone. With the benefit of hindsight and additional data, seasonal noise seems to have been a major contributor to the summer 2023 deterioration in claims. Claims recovered (decreased) last fall and were showing healthy readings by the spring of 2024.
By May, claims began to rise again as suspected; however, the data was loosely following the 2023 pattern until early August when they surged just as the aforementioned growth scare was emerging. In retrospect, this bounce was likely the result of Hurricane Beryl, which led to an outsize pickup in filings for unemployment benefits in Texas, and in tandem with normal auto plant shutdowns in Michigan as factories retooled to produce next year’s models. With the effects from Hurricane Beryl fading and auto plants now back online, claims are once again tracking below 2023 levels, a positive sign for the continuation of the economic expansion.
The signal from initial jobless claims is consistent with an array of labor data that shows normalization rather than cooling. Due to a soft nonfarm payroll reports in August of 142,000 and downward revisions to June and July job creation figures, the average over the last three months has been 116,000, which is below the 178,000 average seen in 2018-19, a period generally seen as consistent with the notion of maximum employment. Nevertheless, the U.S. economy continues to create jobs, albeit at a more tepid pace. While the employment picture has softened, ongoing hiring combined with cooling inflation — which is showing up in the important area of commodity prices – has improved the prospects of a soft landing look in our view.
Jeffrey Schulze, CFA
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