Since the Federal Reserve began implementing its most aggressive interest rate hike since the 1980s in March 2022, investors have been paying attention to changes in the labor market.
Nowadays, a renowned economist sees signs of large-scale layoffs beginning, which may soon be reflected in key economic data closely monitored by the market.
Torsten Slok, Chief Economist of Apollo Global Management, pointed out in an email comment that an increasing number of companies are notifying employees of impending factory closures and layoffs based on data collected under the Worker Adjustment and Retraining Notification Act (WARN).
The WARN, which can be traced back to the late 1980s, required many large employers to notify workers and state governments 60 to 90 days in advance when large-scale layoffs were about to occur. The data cited by Slock is based on estimates from the Cleveland Federal Reserve.
Slock used a simple statistical model to predict that the increase in layoffs will soon be reflected in weekly unemployment benefit application data, which tracks the number of Americans applying for unemployment benefits each week.
Slock said, "Regression predictions using WARN notifications on unemployment indicate that the number of first-time applicants for unemployment benefits in October will rise to levels between 250000 and 300000 in the coming weeks
It is difficult for Wall Street to ignore such growth. According to the latest data, the number of Americans applying for unemployment benefits in the previous week recorded 209000, and the previous value increased from 207000 to 209000, but other aspects are still close to the low point during the COVID-19 epidemic. (Mini program: Number of initial claims for unemployment benefits in the United States for the week)
Previously, monthly data released by the US Department of Labor showed that the US added 336000 new jobs in September, far exceeding the expected 170000. Although the rate of wage growth, which is considered a key factor in inflation, has slowed down, the previous months' employment data has been revised up, breaking the continuous downward trend.
Some economists interpret these data as supporting the view that the Federal Reserve will successfully guide the US economy towards a "soft landing," where policymakers can curb inflation without seriously disrupting the labor market and economy.
Any sign that layoffs are beginning to increase may seriously affect investors' expectations of the direction of the U.S. economy, which may affect the market, especially the U.S. treasury bond bond and stock markets.
The S&P 500 index rose by nearly 14% in 2023, but with the rapid rise in the yield of US treasury bond bonds, the benchmark index of this large cap stock has fallen back since the high point at the end of July. The Dow Jones Industrial Average has shrunk to 2.5% so far this year.
Historical data shows that once layoffs begin, they tend to snowball and get bigger. Claudia Sahm, an influential former Federal Reserve economist, used this model as the basis for the so-called Sam's rule.
This rule aims to determine the beginning of an economic recession through a sharp increase in unemployment rate, in order to help policymakers take faster and more proactive action to support the economy and workers. When the three-month moving average of the US unemployment rate rises by 0.5 percentage points or more compared to the previous 12 month low, it marks the beginning of a recession.