Is Stock Market Signaling Recession Extension? Unemployment Data Could Provide The Answer

On Thursday (November 5), the DOL “Unemployment Insurance Weekly Claims” report is released. Ignore it. Its usefulness is past.

Instead, focus on Friday’s BLS “Employment Situation” release. That report for October will show whether the unemployment picture supports a short or extended recession.

Why ignore the “Unemployment Insurance Weekly Claims” report?

  • First, initial claims are naturally lower at this point in a recession, so only an abnormal upsurge would be noteworthy
  • Second, continuing claims cover the waterfront, from those filing their first continuing claim to those filing their 100th or more
  • Third, the special coronavirus unemployment benefits (expanded inclusion and lengthened time limits) are expiring. They produced higher than normal unemployment claims and their loss (reduced continuing claims) can give a false impression of the unemployed finding work
  • Fourth, the coronavirus-caused shifts in the work force, like the oft-discussed shakeup of two income families with at-home children, can also reduce claims without increasing the employment numbers

Here’s a last look at the actual (non-seasonally adjusted) claims data picture…

How will the “Employment Situation” report provide valuable information?

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The DOL spends each mid-month period surveying people on a variety of employment issues. Groupings (e.g., by age, gender and education) can reveal important trends.

Key to the recession question is the breakdown by weeks of unemployment. Temporary unemployment is a common occurrence in even a robust economy. In a recession, however,  temporary unemployment can evolve into extended unemployment for many.

That, then, is the sign to look for in the DOL report.

The two graphs below show the dynamics during normality, through the Great Recession and recovery, and then into the current period.

Note the quick “recovery” in short-term unemployment, reflecting new layoffs falling back to normal levels…

Now, note the recessionary shift of the unemployed into the longer-term groupings…

What insight will the October data provide?

Hopefully, the 15-26 week grouping declines faster than the 27+ week grouping rises . If so, it would signal that the recovery was continuing.

However, with commentaries of slowing growth in October, there is the possibility of that dynamic weakening. Such a reading could support an outlook for an extended recession with lower 2021 economy growth – something that is worrying the stock market now.

The bottom line – Don’t count the recession out

Myriad uncertainties continue to dog the economy and financial markets. The current stock market drop indicates that concerns about what could go wrong have returned to investors’ thinking.

However, lower stock prices neither confirm that bad times are upon us nor do they prove that this is a time of outstanding stock bargains. Therefore, the best strategy looks to be maintaining patience and cash reserves while seeking fundamental insights into the recession’s possible improvement or deterioration.

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