The key metric to watch for labor market warnings
The Sandbox Daily (5.1.2025)
Welcome, Sandbox friends.
Today’s Daily discusses:
initial jobless claims pick up
Let’s dig in.
Blake
Markets in review
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Quote of the day
“Harsh reality is always better than false hope. ”
- Downton Abbey
Initial jobless claims pick up
There remains a robust correlation between the jobs market and economic activity. This relationship is logical and straightforward. When consumers are confident in their job security and the ability for wages to keep up (or beat) inflation, they are more willing to spend. Conversely, if workers fear the possibility of a layoff, they tend to save.
Among the many job reports released this week (JOLTS, ADP, nonfarm payrolls), one that caught headlines today was the weekly initial jobless claims data from the Bureau of Labor Statistics (BLS).
Initial claims for unemployment insurance increased 18,000 last week to an above-consensus 241,000. It was the highest level in two months but still within the range since late 2021, which suggests that layoffs remain contained.
This is a noisy data series so it’s important to look at a four-week moving average, which itself stands at 226,000.
While the market doesn't seem to focus much on the initial (and continuing) jobless claims data as much as the monthly data, it is constructive to track because it helps us affirm the divergences we see in the monthly data.
Furthermore, it is much closer to real-time trends, so it quickly alerts us to potential structural shifts coming down the pike.
With tariff related uncertainty weighing on economic activity, watching the response from the labor market and any spikes that unfold over the coming weeks and months will be instrumental to identifying potential signs of recession looming on the horizon.
To no surprise, the 4-week moving average of initial unemployment claims begins to rise at/before the start of a recession and reaches a relative peak at the end of a recession. In fact, the trough in initial claims precedes economic recessions by an average of 11 months (range is 3-mo to 20-mo), while claims tend to hit their apex as recessions end.
Prior recessionary peaks saw weekly initial claims peak at 500,000 or 600,000. Outside of the Covid spike, initial unemployment claims have never been greater than 700,000 for a given week.
The number to watch is in the range of 300,000 to 400,000 initial claims because once that threshold triggers, it often continues to rise higher and leads to recession.
With the four-week moving average of initial jobless applications at 226,000, claims do not suggest any material weakness in what has been an incredibly resilient job market in the post-Covid world.
Sources: St. Louis Fed, Bloomberg, Advisor Perspectives
That’s all for today.
Blake
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Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. The information and opinions provided within should not be taken as specific advice on the merits of any investment decision by the reader. Investors should conduct their own due diligence regarding the prospects of any security discussed herein based on such investors’ own review of publicly available information. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily. Any projections, market outlooks, or estimates stated here are forward looking statements and are inherently unreliable; they are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur.
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