At Last, Employment Seems to Be Stabilizing
Positive employment news leads us to believe that the economy is bottoming.
Last week was a banner week for positive employment news, which should serve to bolster consumer confidence and eventually consumer spending. We continue to hold our view that the economy will hit its bottom sometime in the second quarter and that although unemployment is rising at a slower rate than before, it will peak later this year in the 9%-10% range.
Because of the high unemployment rates and poor factory utilization rates, we believe that we will not see inflation rise much above 1%-2% over the next 12-24 months. Over the next five years, we believe that the inflation rate could move up some due to increasing government deficits and an accelerating economy. However, we are not panicked by the prospect of runaway inflation. A combination of low Asian wages, improved productivity, and higher interest rates could act as significant moderating influences on the inflation rate.
Turning to the data, initial claims, the most leading of the employment indicators, posted its fifth straight week of improvement. On a raw number basis, the number of new claims has now fallen from 674,000 on March 28 to 601,000, a decline of more than 10%. The four-week moving average, which tends to smooth out the week-to-week volatility, has also shown consistent improvement. This indicator typically peaks a month or so before the bottom of the economy. Given that we peaked in late March, the economy could potentially have bottomed in late April or early May. The Challenger, Gray and Christmas Layoff Report showed dramatic improvement, with reported layoffs declining from 150,411 in April to 132,590 in March--down from a peak of over 240,000 earlier this year. This indicator is based on announced layoffs and not actual firings, so it has the potential to lead even our initial claims metric. This Challenger, Gray and Christmas survey and the Watson Wyatt layoff intentions survey (reported in April) both bode well for a better employment situation in the months ahead.