Falling Weekly Claims Signal Overheating Job Market

Average weekly claims and the economy 

The Conference Board uses average weekly unemployment claims as a constituent of its Leading Economic Index (or LEI). The US Federal Reserve considers the state of the employment market and the level of inflation (TIP) when making monetary policy decisions. Unemployment in the US is at a multi-decade low, leading to a shortage of skilled labor and forcing employers to increase wages to attract employees. The Conference Board Leading Economic Index (or LEI) uses average weekly initial claims as a constituent in its economic model rather than the popular non-farm payrolls because weekly claims, when adjusted for seasonality, provide a more accurate account of underlying economic conditions. The average weekly unemployment claims carry a weight of 3% on the LEI.

Falling Weekly Claims Signal Overheating Job Market

April average weekly claims at a five-decade low

The average weekly unemployment claims in April decreased to 221,600 from the March reading of 228,500 claims and had a net positive impact of 0.10 or 10% on the April LEI reading. This is the lowest level for average weekly unemployment claims since 1969. The latest employment report from ADP indicated that midsize businesses (IJH) and small size businesses (VO) increased hiring in April, while hiring in the manufacturing (XLI) sector declined marginally in April.

Implication for markets

A strong job market is positive for the economy, but in the current economic climate, it could lead to an overheating job market. Businesses have reported difficulty finding skilled workforce and are being forced to raise wages. From an economic standpoint, the US Fed could be pushed towards tightening if the job market heats up and inflation picks up, which could lead to higher interest rates. Equity and bond (BND) market investors dread higher rates, as it dents their investment returns. For the time being, inflation growth is stalling rate hike expectations, but markets need to start expecting higher rates in the future. In the next part of this series, we’ll analyze why consumer goods and material orders continued to soar higher.