Key Takeaways
- The U.S. economy has not entered a recession despite the inverted yield curve, which historically predicted recessions, and this may be due to the relatively solid labor market setting.
- The monthly Employment Situation report and the initial jobless claims series are crucial indicators for the money and bond markets, as well as for the Federal Reserve (Fed).
- The current level of new jobless claims is significantly lower than the levels prior to the past four recessions and the average level of claims over a 40-year period, indicating a relatively strong labor market.
Remember when an inverted yield curve used to predict recessions? Here we are about two years removed from the Treasury yield curve moving into negative territory, and the U.S. economy has yet to move into recession territory. The economy’s resilience has certainly been a surprisingly welcome development and has left many a market participant wondering what happened. Indeed, history has shown us that the track record of inverted yield curves predicting a recession was almost foolproof. Now, I certainly don’t want to put a whammy on things, but if you’re wondering why an economic downturn has yet to occur, perhaps you don’t need to look any further than the relatively solid labor market setting.
There is no question that the monthly Employment Situation report is essentially either 1 or 1A in terms of importance, not just for the money and bond markets but for the Fed as well. Recently, inflation data has also snuck into the top category, but that’s for another blog.
Another set of employment data that is rather useful to focus on is the initial jobless claims series. This report comes out weekly and offers investors and policy makers a more “real-time” look at labor market trends. In addition, it is one of the 10 leading economic indicators.
This series has captured its own fair share of headlines since the Fed began its aggressive rate hike cycle, as market participants have been looking for clues to any adverse impact this tightening episode may have had on the labor markets. Once again, in surprising fashion, the level of new weekly unemployment claims has remained historically low despite the rise in interest rates.
There have been periods in the last year or so when the level of new claimants would rise unexpectedly, but then in future reports, the number would come back down again. More recently, the weekly reading rose to a 10-month-high watermark, and needless to say, there was some chatter that this increase could finally be a sign that the labor markets may be beginning to soften up.
While perhaps that may prove to be the case, I thought it would be prudent to put the level of jobless claims into some perspective and not rush to any conclusions. In order to get a more accurate picture, I decided to go back and look at the 40-year period prior to COVID-19 for some guidance. Interestingly, this also coincides with many analyses regarding the inverted yield curve and recession relationship.
So, what does one discover about the current reading of 238,000 new jobless claims? Two very important factoids:
- It is at least 100,000 or more below the levels that existed prior to the past four recessions.
- It is 125,000 below the average level of claims for this 40-year period.
Conclusion
While the monthly inflation data might be getting “top billing” of late, investors should also remember the importance of labor market trends and their impact on Fed policy, a point Chairman Powell reiterated at the June FOMC presser. Against this backdrop, the weekly jobless claims report can serve as a useful indicator for investors to focus on, but as yet, it is not flashing any warning signals.
U.S. investors only: Click here to obtain a WisdomTree ETF prospectus which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.
There are risks involved with investing, including possible loss of principal. Foreign investing involves currency, political and economic risk. Funds focusing on a single country, sector and/or funds that emphasize investments in smaller companies may experience greater price volatility. Investments in emerging markets, currency, fixed income and alternative investments include additional risks. Please see prospectus for discussion of risks.
Past performance is not indicative of future results. This material contains the opinions of the author, which are subject to change, and should not to be considered or interpreted as a recommendation to participate in any particular trading strategy, or deemed to be an offer or sale of any investment product and it should not be relied on as such. There is no guarantee that any strategies discussed will work under all market conditions. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This material should not be relied upon as research or investment advice regarding any security in particular. The user of this information assumes the entire risk of any use made of the information provided herein. Neither WisdomTree nor its affiliates, nor Foreside Fund Services, LLC, or its affiliates provide tax or legal advice. Investors seeking tax or legal advice should consult their tax or legal advisor. Unless expressly stated otherwise the opinions, interpretations or findings expressed herein do not necessarily represent the views of WisdomTree or any of its affiliates.
The MSCI information may only be used for your internal use, may not be reproduced or re-disseminated in any form and may not be used as a basis for or component of any financial instruments or products or indexes. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each entity involved in compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties. With respect to this information, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including loss profits) or any other damages (www.msci.com)
Jonathan Steinberg, Jeremy Schwartz, Rick Harper, Christopher Gannatti, Bradley Krom, Kevin Flanagan, Brendan Loftus, Joseph Tenaglia, Jeff Weniger, Matt Wagner, Alejandro Saltiel, Ryan Krystopowicz, Brian Manby, and Scott Welch are registered representatives of Foreside Fund Services, LLC.
WisdomTree Funds are distributed by Foreside Fund Services, LLC, in the U.S. only.
You cannot invest directly in an index.
This article originally appeared on WisdomTree's website and is reprinted on VettaFi | Advisor Perspectives with permission from the author. For more information, please visit WisdomTree.com
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out our most recent white papers.
© WisdomTree, Inc.
Read more commentaries by WisdomTree, Inc.
