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Low Initial Jobless Claims Signals Labor Market Turnaround

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Initial jobless claims

Initial jobless claims are one of the few labor market indicators released every week. Unemployment is a profound economic growth driver.

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.

Historically, real estate prices tracked very close to incomes. Until the real estate bubble burst, the ratio of median home price to median income remained in a relatively tight range of between 3.2x and 3.6x. So, if unemployment is rising, there’s little upward pressure on wages. This tends to be negative for home prices. Also, people who are unemployed can’t qualify for a mortgage, so the pool of buyers shrinks.

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Initial jobless claims are at top-of-the-market levels

Last week, 289,000 people filed first-time unemployment claims. For the 16th time this year, the print on initial jobless claims was below 300,000. We haven’t seen these levels since April 2000. In fact, as a percentage of the population, initial jobless claims are at their lowest since the late 1960s.

Initial jobless claim levels below 300,000 usually correlate with economic booms, like 1999–2000 and early 2006. The fact that our economy didn’t fall like it did in 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, there’s a smaller subset of people who can lose jobs.

Impact on commercial REITs

We’re starting to see the consumer wake up and begin to spend. To learn more, read Consumer comfort ticks down as personal finance deteriorates. In particular, the luxury end of the retailing sector seems to be performing the best. This is good news for mall REITs such as Simon Property Group (SPG), General Growth Properties (GGP), CBL & Associates Properties (CBL), and Taubman Centers (TCO). It’s also good for the Vanguard REIT Index Fund (VNQ).

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

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