Over the past few years, U.S. Initial Jobless Claims has fallen incessantly. Right now it is lower than previous lows in many historic economic expansions. In fact, it is almost near its all time lows since this data series began in 1967! Here’s the chart.
Some investors are concerned that initial claims are too low. They think that initial claims – which are near historic lows – can’t fall much more, so the economy can’t grow much more before entering into a recession. This is the “economic growth and consumers are tapped out” thesis.
Investors shouldn’t be worried. Let’s assume the worst case scenario. Let’s assume that initial claims have bottomed and will start to rise. History shows that initial claims ALWAYS bottom before an economic recession begins. In addition, initial claims almost always bottom before a bear market for U.S. stocks begins.
With initial claims so low right now, it’s clear that we are in the final quarter of this economic expansion cycle. In the last quarter of most economic expansion cycles, many indicators have no more room to improve. They start to deteriorate for a while (i.e. sometimes 1-2 years) before the economy tips into a recession.
Right now we have yet to see any deterioration in the U.S. economy. (We need to watch out for Retail Sales. Flattening Retail Sales demonstrates that the American consumer is mostly tapped out as of May 2017). Based on current projections, the economy will not enter into a recession for at least 1 to 2 years. In 1-2 years (2018-2019), we’ll re-evaluate and see how the economy is doing at that time.
Our model also does not see a bear market on the horizon.
Let’s look at the historic cases. We’ll compare:
- How long did it take for a recession to begin after Initial Claims bottomed.
- How long did it take for a bear market to begin after Initial Claims bottomed.
January 28, 2006
Initial claims bottomed in January 2006 and remained mostly flat until May 2007 (although there was a small uptrend). Then Initial Claims really started to rise. The recession began almost 2 years later in December 2007.
April 15, 2000
Initial claims bottomed in April 2000 and started to rise incessantly. The recession began almost 1 year later in March 2001.
January 21, 1989
Jobless claims bottomed in January 1989 and started to rise. A recession began almost 1.5 years later in June 1990.
April 18, 1981
Initial claims were basically flat from November 1980 to April 1981, although it did make a marginal new low on April 18, 1981. Initial claims then started to rise and a recession began less than 3 months later in July 1981.
November 11, 1978
Initial claims were pretty much flat from April – November 1978, although the indicator did make a marginal new low on November 11, 1978 (lower than April 1978 by 5000). Initial claims went steadily higher for more than a year until a recession began in January 1980.
January 27, 1973
Initial claims bottomed in January 1973. The recession began in November 1973 (the recession was primarily caused by OPEC’s oil embargo on the U.S., which caused U.S. business and consumer spending to crater).
November 30, 1968
Initial claims were virtually flat from April – November 1968, although it did make a marginal new low on November 30, 1968. Then Initial Jobless Claims rose for a year before the recession began in December 1968.
February 25, 2017
Initial Claims made a new low in February 2017, and since then the overall trend has still been down. It does not look like Initial Claims have bottomed.
Historic bear markets
There have only been 4 bear markets since the S&P 500 began in 1950:
Initial claims bottomed in January 2006 while the S&P topped more than 1.5 years later in October 2007.
Initial claims bottomed in April 2000 while the S&P topped in March 2000. However, the S&P only started to really fall in September 2000. It’s important to note that the S&P was forming a flat top from March-August 2000. It almost made a new high in late-August 2000. So from this perspective, Initial Claims did lead the S&P 500’s bear market.
Initial claims topped in January 1973, which was also the S&P’s top. According to our model, the first leg 1973-1974 bear market was supposed to be a significant correction. It was not supposed to be a bear market. Then OPEC’s embargo changed everything and turned the significant correction into a bear market.
Initial claims topped in November 1968 and the S&P 500 topped one month later in December 1968.
Why are initial claims so low?
Initial claims are approaching the lowest levels of the 1970s. But remember that today’s workforce is twice as large as that of the 1970s! So why are claims so low?
We don’t really know. Here’s one hypothesis.
Wage growth is low right now. At this point of the economic expansion, wage growth is typically a few percentage points higher. Perhaps employers are firing fewer workers and offsetting those labor costs by keeping a lid on wage costs.