An Out-Of-Consensus Prediction

It’s too early to worry about jobless claims, but not too early to pay attention to them.

Following the onset of the pandemic, initial claims enjoyed top billing for more than a year. By late 2021, though, they’d fallen back below the proverbial fold after dropping to levels that may as well have been zero.

Now, with recession fears rising and the Fed having begrudgingly acknowledged that bringing inflation down is likely to entail at least some job losses, claims are grabbing a few headlines again.

Initial claims rose to 235,000 last week, Thursday’s report showed. That was more than expected and the highest since January.

The smoothed average is now 232,500. The week to July 2 marked the 12th week in 13 that the average was higher (figure above). Continuing claims, while still very low historically, were the highest since April 23 in the week to June 25.

It’s tempting to write this off. There’s not a lot one can glean from it. Wednesday’s JOLTS data suggested the US labor market still suffers from an acute supply-demand imbalance with far more available jobs than workers willing to fill them. Friday’s nonfarm payrolls report was widely expected to confirm that the jobs market, at least, remains a semblance of robust at a time when other indicators of economic momentum are decelerating.

I still believe — and to call this an out-of-consensus view would be to materially understate the case — that economists and market participants may be underestimating the extent to which the panicked response to pandemic distortions on the part of purchasing managers, HR departments and homebuilders, left the US economy precariously exposed to a sudden evaporation of demand.

We know retailers have excess inventory. The figure (below) is just a simple snapshot. There are better, more nuanced ways to visualize the overhang, but in the interest of brevity, I’ll recycle the most straightforward illustration I have.

Plainly, some of that “stuff” will have to be discounted if retailers hope to move it at a time when the combination of goods-to-services switching and the financial imperative of diverting more income to necessities will reduce household demand for discretionary purchases of consumer products.

In my view, that’s just tip of the iceberg. If demand crumbles amid high inflation, a diminished wealth effect from hobbled 401(k)s and higher rates, millions of job openings could become superfluous virtually overnight, while mortgage rates that are double what they were late last year combined with record high property prices may leave a sizable share of newly-built homes similarly redundant.

I won’t delve any further into that here as I’ll be addressing it at some length in a series of forthcoming articles, but for now I’d say the following. Notwithstanding the often sage, real-time advice we receive from our “fight or flight” instinct in times of peril, panic isn’t conducive to good decision making. Employers and homebuilders were in a state of panic for most of 2021, a year defined by voracious demand and a dearth of supply.

In the event the economy slows materially, it seems plausible to suggest that many of the decisions made last year, from hiring to stocking to building, will be exposed for exactly what they were: Haphazard judgment calls born of hysteria and perceived necessity rather than careful planning and prudent execution.


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4 thoughts on “An Out-Of-Consensus Prediction

  1. As Mike Tyson said, everyone has a plan until they are punched in the face. Individuals and businesses coped as best they could under trying circumstances. Frankly, better than most would have thought- given the emergency. We are still dealing with a boat that took on a lot of water in several storms. It should not be surprising that the boat still is precarious although still better than in 2021. As far as employment goes, it is rarely a leading indicator- coincident is the best you can hope for with labor markets. It is derivative from other demand markets. The Fed is trying to slow things down, precisely to address an excess demand issue for labor and other supply constrained goods. It is not easy to stick that landing. It is better to look at real time markets, especially those that may not be financialized for clues- for example commodities that do not have futures markets tied them. Greenspan used to look at sales of men’s underwear as an indicator of fundamental demand for an item that was not expensive but was discretionary. The Fed is well aware that short term interest rates are a blunt tool- as is are the financial markets. The FOMC may decide to go 75 again, but there is certain to be major 2nd and 3rd derivative adjustments from that kind of increase in short rates. It is likely to be a bumpy ride.

  2. “In the event the economy slows materially, it seems plausible to suggest that many of the decisions made last year, from hiring to stocking to building, will be exposed for exactly what they were: Haphazard judgment calls born of hysteria and perceived necessity rather than careful planning and prudent execution.”

    Great points, sir. There were also some CYA/Job security forces at work. Better to triple order a 79 cent capacitor than allow the missing component to stop production.

  3. It seems like a number of people are trying to call the bottom and are buying in betting that the Fed will roll over after the next 75 bps hike. I’d love to see the equity inflows numbers as I’m thinking longer term investors are keeping cash rather than getting suckered into a Bear Rally (though that IS where some traders make their whole year’s wins)…
    I also wonder if it’s starting to be a “flight to safety” to US equitied and the dollar as possibly some investors are wary after China’s brutal take down of their own tech industry and now the EU faces a standoff with Putin.

    Found the inflows numbers, someone smart than me can give it a narrative: https://www.ssga.com/us/en/intermediary/etfs/insights/june-flash-flows-investors-start-summer-lacking-conviction

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