Jobless claims and non-farm payrolls

Two popular indicators that investors frequently watch to measure the temperature of the labor market in the US are the jobless claims and the non-farm payrolls. Historically, the market has been focusing more on the monthly NFP prints, but the recent waves of selloffs due to the Covid-19 crisis has raised investors’ interest on the weekly jobless claims figures as the number of Americans filing for unemployment benefits has surged to over 6 million in the past two weeks.

In this post, we try to answer the following two questions that have been making the headlines in recent weeks:

  • Is there a link between jobless claims and non-farm payrolls?
  • As jobless claims are updated every week, does it lead NFP?

 

Jobless claims are a statistic that is reported every week by the US Department of Labor and counts the number of people filing to receive unemployment insurance benefits. There are two categories: initial – with people filing for the first time – and continued, which comprises of unemployed people who have been receiving unemployment benefits for a while. What is surprising this time is the recent rate of change of the initial jobless claims, which surged from multi decades lows of 200+ thousands to over 3.3mil, 6.8mil and then 6.6mil on April 4th. Prior Covid-19, initial jobless claims have generally averaged 360K since the 1960s, from lows of 200K to highs of 700K (figure 1, right frame). The number of continued jobless claims is now greater than the one experienced during the Great Financial Crisis, which reached a peak of 6.6 million in June 2009.

Figure 1

FI1

Source: Eikon Reuters

Non-farm payrolls are also released by the Department of Labor on a monthly basis as part of a comprehensive report on the state of the labor market, but do not include farm workers, private household employees or non-profit organization. It was reported that the US lost 701K jobs in March, which brought the unemployment rate to 4.4%. Figure 2 (left frame) shows a scatter plot of the continued jobless claims with the NFP monthly; we are currently sitting at uncharted territories, and we would expect the next prints of NFP to collapse to much lower levels in the coming months, which would raise the unemployment rate to more than 20 percent. According to the fitted line, a 701K drop in NFP would coincide with continued jobless claims of 4.5 to 5 million.

In figure 2 (right frame), we look at the yearly gains (losses) in NFP overlaid with the continued jobless claims times series. We can notice that to the exception of the Great Financial Crisis, the amount of people filing for unemployment benefits has always been greater than the number of jobs lost in the US economy. This is what we expected as the NFP do not include a little portion of US employees. If you add the number of jobs lost in the agricultural industry in addition to the local government, private household and non-profit employees, you will certainly reconcile the two figures (i.e. number of total jobs lost = continued jobless claims).

Figure 2

FI2

Source: Eikon Reuters

It is difficult to infer a level of unemployment rate from the jobless claims data, but we just know that the level will be elevated in the coming months. Some economists have forecasted a 10% unemployment this summer, but we think it could actually reach 20 percent as the uncertainty around employees’ status will surge to historical highs. US households will start to save more as most of the companies are now very vulnerable to the demand shock, which would in theory be deflationary (at first).

Even though the chart is far from being perfect (figure 3), we like to look at the 3-year returns in stocks (in order to smoothen the volatility in equities) as a leading 1-year leading indicator of unemployment. Sharp and sustain selloffs in equities are usually associated with rising unemployment as equities’ valuations directly reflect the level of consumer sentiment in the market.

Figure 3

FI3

Source: Eikon Reuters

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