Labor Market Counters Recession Fears

A lack of layoffs could be hinting that the economy is stronger than many think.


As regular readers know, I have been somewhat fixated on the low level of initial jobless claims—around 300,000 a week—as a positive sign for the economy. Employees may not be doing a whole heck of a lot of hiring, but they are not firing much either. Why so low? As Ed Yardeni explained to his Oak Associates clients yesterday:

While a recession could change their minds, employers are reluctant to institute mass layoffs, which can result in the loss of skilled workers who are costly to replace when the economy improves. I've previously observed that the U.S. is becoming increasingly a knowledge-based economy. It's hard to fire knowledge workers because they literally know too much about how to run your business. Furthermore, business managers may be more confident than investors seem to be that stimulative monetary and fiscal policies will work, as they have in the past to revive economic growth.

Whatever the reason, there is some new evidence that my instincts are correct on this one. According to a new economic forecasting model—one looking at the three-month change in the unemployment rate and initial jobless claims—developed by my old friend Tim Kane, chief labor economist for the Republican staff for the Joint Economic Committee of Congress, the odds of a recession are at just 36 percent or so—and probably dropping. Wall Street economists put the odds at 50 percent or better while the betting markets put the odds of a recession at 2 in 3.

The current value of this paper's [recession indicator] at this time (35.5 percent) should be taken with a grain of salt—it is based on simultaneous spikes in the two employment numbers utilized. Already in 2008, weekly jobless claims are declining dramatically (from 344,000 a month ago to 314,750 last week), and the RPI index will almost certainly decline as a result. The real economy may be robust, but the financial side of the economy faces serious challenges in the wake of the subprime mortgage crisis. A financial recession may well create duress into the real economy, causing a genuine contraction in output and employment. Whether this happens, the evidence provided in this paper hopefully gives observers of the U.S. economy a better sense of what numbers to watch.