Why initial jobless claims fall to boom-era levels



Initial jobless claims decreased to 289,000 for the week ending August 2

Initial jobless claims are one of the few labor market indicators released every week. Unemployment is a profound driver of economic growth. Persistent unemployment has been the Achilles’ heel of this recovery. While it seems like the big layoffs are largely finished, firms are still reluctant to aggressively add staff. Initial jobless claims have been holding steady in the low 300,000s.

Initial Jobless Claims

Historically, real estate prices have tracked very closely with incomes. In fact, up until the real estate bubble burst, the ratio of median home price to median income remained in a relatively tight range of 3.2–3.6x. So, if unemployment is rising, there’s little upward pressure on wages, which tends to be negative for home prices. Also, the unemployed are unable to qualify for a mortgage, so the pool of buyers shrinks.

Initial jobless claims are trending back down again

This is our second sub-300,000 print on initial jobless claims this year, which was the lowest since May, 2007. Sub 300,000 initial jobless claim levels are usually associated with economic booms, like 1999–2000 and early 2006. The fact that our economy didn’t fall like the late 1990s or early 2006 is probably due to the low labor force participation rate. If there aren’t that many employed people to begin with, that’s a smaller subset of people who can lose jobs.

Impact on commercial REITs

We’ve been starting to see the consumer wake up and begin to spend. In particular, the luxury end of the retailing sector seems to be performing the best. This is good news for mall real estate investment trusts (or REITs) like Simon Property Group (SPG), General Growth Properties (GGP), CBL and Associates (CBL), and Taubman (TCO), as well as the Vanguard REIT ETF (VNQ).

Generally, recessions end when the consumer finally begins to spend. The spending is often out of necessity, not desire. Eventually, the clothes wear out and the 12-year-old car becomes too expensive to keep fixing. We have a tremendous amount of pent-up demand in the U.S. right now, and it appears we may be at the inflection point.

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