Wednesday, July 9, 2008
Tomorrow I am scheduled to appear on Bloomberg TV in the Starting Bell segment. The best way to “not sound stupid on TV” is to be prepared. I have a Ph.D. in Economics, lots of teaching experience, and presented my work at conferences. However, all of that does not compare to appearance on live TV.
What you may not know is the mechanics of the interview process. I will talk to the host using a remote camera system; the interviewer will ask me questions from the comfort of my own office building. That is very convenient, as I do not need to fly to New York, but it is also slightly awkward. Conversing with the host in person is quite different from conversing with a camera. It’s just you, the phantom host, a report that just came out (the unemployment claims report at 8:30am), and a bunch of traders in the background.
As an act of preparation, I will write down the interview in script.
The premise: Economist (Nontruths) hears latest release of the initial unemployment claims report for the week ending in July 5.
The previous data: Initial claims 404,000; 4-week moving average (looks at more of a trend) 390,500; Continued claims (those who continue weekly benefits past the first week) 3.1 million
Consensus expectations for tomorrow: Initial claims 399,000
Unemployment claims are state-funded benefits that workers may accrue if they lose their job. As an example, Starbucks is expected to close around 600 stores and layoff up to 12,000 workers. The result will be an increase in the unemployment claims reports. This report is important because it is a precursor for July’s employment report.
Below are three possible outcomes of the claims report with 3 scripted responses.
Better than expected:
Angela (host): This just in, the unemployment claims for the week ending on July 5 is 385,000. This is down 19,000 from the previous unrevised number of 404,000. What is your reaction to this report?
Nontruths (me): My initial reaction, Angela, is that is a good report. The claims report is a weekly report and highly volatile, so it is better to look at the 4-week moving average, which fell for the first time in five weeks. We still have one more claims week to go before the next payroll survey, but if reduced claims continue, then we could be looking at a rather benign July employment report. However, a rise in next week’s claims report will signal another poor July employment report.
On the bright side, the report gives the U.S. economy some time to gather its thoughts. The job market has been tumbling, and although the July report is still likely to post further job loss, the labor market’s path is not predetermined. It is certainly possible that further claims reductions will occur, but if job creation is stronger than the increased claims reports, then the contraction of the job market will be short lived.
However, given the ongoing troubles in key sectors of the economy, problems are likely to persist. We will probably see claims adjust upward for a while, but eventually, the economy will turn around.
As a side note, the claims data are flirting with recession territory (last recession averaged roughly 414,000 claims per week), but the net job loss (payroll number) is rather light. Over the last six months, almost 500k jobs have been lost, or -73k average monthly jobs lost. Compare that to the 1.6million, or -181k monthly average jobs lost in the course of 9 months during the 2001 recession, and this cycle appears less gloomy.
Just as expected:
Angela: This just in, the unemployment claims for the week ending on July 5 is 400,000. This is down 4,000 from the previous unrevised number of 404,000. What is your reaction to this report?
Nontruths: My initial reaction, Angela, is this that we are playing with fire here. As the report came in at expectations, the 4-week moving average is up, or claims are up from one month to another. As long as this trend continues, we may be looking at a nasty July employment report, or 7 consecutive months of job loss.
The bright side (if there is any) is that some of the upward tick in claims is due to June’s floods in the Midwest; this will subside and the claims report should recede back to the 380k mark, which is still below recession level.
Repeat “As a side note,…” from above.
Worse than expected:
Angela: This just in, the unemployment claims for the week ending on July 5 is 420,000. This is up 16,000 from the previous unrevised number of 404,000. What is your reaction to this report?
Nontruths: My initial reaction, Angela, is that this is a bad report. The 4-week moving average is up and trending upward. The two-week upward tick in claims does not bode well for the July employment report.
However, I am not ready to jump off of the bridge just yet. The report does indicate that a further contraction of the labor market in July is likely, but the severity of the contraction has not yet met that seen in the 2001 recession.
Repeat “As a side note,…” from above.
For any of the above scenarios:
Angela: What does this report tell us about the U.S. economy?
Nontruths: The report is what it is: a high frequency labor market report that indicates a possible direction in job growth for the July employment report. The risks to the labor market are very real; the July report will likely post the seventh consecutive month of job loss.
However, the cards have not all been dealt. The weekly claims report only tells half of the employment story, job destruction. The job creation portion is told by labor productivity, which is still growing. So in the end, the employment report is more than simply job destruction, and can go either way. Eventually, the market will stabilize.
Beyond that and discussed in my previous blog, The U.S. economy: Not in a recession until the fat lady sings, the evidence does not indicate that we are in a recession. The claims report is simply a labor report indicating the state of the labor market, which is not good.
There are other macroeconomic indicators that are still growing: consumption being the largest. During a period of record falling housing wealth, record high gas prices ($4.11/gallon on average), and slight job loss, it is easy to forget that the health of the economy (expansion or recession) is measured using many variables, and not just the labor variables.
Angela: Thank you, Nontruths (you will find out my real name if you watch tomorrow).
Nontruths: Thank you, Angela, for having me.
Please leave your comments and/or opinions. Best, Nontruths