A Better Indicator of Labor Demand
Outdated measurement methodologies used to calculate the unemployment rate and payroll data have encouraged the Fed to broaden its watch-list of labor data. Now the Fed is looking at other benchmarks like participation rate and wage growth.
They must not realize that the best data to watch is Jobless Claims. The Initial Jobless Claims metric is the flip-side to Nonfarm Payroll. It measures labor demand by looking at firings whereas the NFP looks at hirings. The Initial Jobless Claims data is direct, unsampled, and comprehensive. The NFP data on the other hand is surveyed, sampled, and modeled.
I’d much prefer to rely on reality over a model.
Putting the Data to Work
Assume that the Jobless Claims data doesn’t give us insight into the Fed decision of when to raise rates (if at all). Instead, assume that the data tells us whether the Fed was right and whether there will be additional hikes.
If the Jobless Claims data supports the tight labor market story, for example, then it’s possible the Fed will raise rates again. On the other hand, if Jobless Claims diverge and don’t support a strong labor market, then no further hikes will be made… or worse.
The Jobless Claims Story: California vs. Non-California
Ex-California, Jobless Claims point to no change in the pace of labor demand. Looking at the not-seasonally adjusted data, the difference year-over-year in claims has been pretty constant; 30K-40K below last year’s. (The big swings come from last year’s storms.)
From the perspective of labor demand, the continued drop Y/Y in claims points to steady labor demand and a tightening labor market as the pool shrinks.
From the standpoint of momentum, it’s neither accelerating nor decelerating. The labor market is tightening at the same pace as this time last year.
But California is different. For most of 2014, California layoffs exceeded the previous year’s.
Then everything switched when summer ended. Suddenly claims began to drop far below the previous year. Apparently California’s drought led to fewer hires. This in turn meant fewer firings when harvest season came to an end. (Farm workers are entitled to Jobless Claims benefits.)
Overall, labor demand remains steady. As we go through 1Q and look for signs of labor market (and macroeconomic) strength or weakness, we must track the two signals independently.
California: Labor demand ex-agriculture was flashing weakness in 1H 2014. It’s too soon to tell the pattern for 1Q.
Not California: Labor demand remains constant.
