The State of Jobless Claims in America: One Nation, Most Divisible

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  • Jobless claims are a rare breeds of economic indicator – high frequency and hard data.
  • Broad brush strokes can get you into trouble when examining 50 states, our nation’s capital, Puerto Rico and the Virgin Islands. No two states’ labor markets are created alike.
  • Indiana the most exposed to an industrial slowdown with 28.6% of its economy driven by manufacturing is a desert-island indicator in and of itself.
  • The Institute for Supply Management New Orders is flashing the same heat that’s swept the nation so far this summer, but past ISM heatwaves that were equally protracted culminated with jobless claims in high-manufacturing states hitting record lows.
  • Daimler the German bellwether claims that Chinese customers will buy fewer SUVs following tariffs slapped on US auto imports…from Alabama.
  • Is there a trade to put in place? Always. Short the autos and go long jobless claims.

Jobless claims a rare breed of economic indicator — high frequency and hard data. It may sound like so much noise each Thursday morning, but the signal should never be dismissed. Credit gurus, equity strategists and economists concur. If you prefer mixed metaphors to commit claims’ importance to memory, consider them a desert island, crossover artist. Claims have the capacity to preview where the business cycle is headed, forecast payroll employment, wage inflation, corporate balance sheet health and give us direction of credit spreads and equity prices.

Call it great depth and unmatched breadth. Of course, broad brush strokes can get you into trouble when examining 50 states, our nation’s capital, Puerto Rico and the Virgin Islands. No two states’ labor markets are created alike. Some are known hubs. New York dominates finance. Michigan churns out autos. Nevada caters to gamblers while West Virginia mines coal. You get the point.

There’s always divergence. Take Connecticut’s insured unemployment rate of 1.9%, the third highest in the nation after Alaska and New Jersey, and almost twice the nationwide record-low rate of 1.2%. Including D.C. as a “state,” the insured rate distribution has a “fat” right tail – they deviate greatly from the center of that bell curve you grew to hate in college. Some 36 states’ rates fall below the national average; 15 states are above it. That’s good breadth redefined.

We can even judge the top tail risk – a full-blown trade war – by delving into the state of states’ initial jobless claims. Trade and manufacturing being synonymous, let’s narrow the universe down to a Letterman Top 10 List of states whose economies are driven by manufacturing to the greatest extent:

Betcha didn’t know The Middle’s economy is more than one-quarter factories? That makes Indiana the most exposed to an industrial slowdown and a desert-island indicator in and of itself. You might want to consider a temporary subscription to the Indianapolis Star for the next 12 months. Just sayin’.

Backing out to the nation, the Institute for Supply ManagementNew Orders is flashing the same heat that’s swept the nation so far this summer. The sub-index has been above 60 (50 is dividing line between expansion and contraction) for 13 months straight and 16 of the last 17 months. There’s strength in numbers, so staying with the top 10, past ISM heatwaves that were equally protracted culminated with jobless claims in high-manufacturing states hitting the freezer, as in hitting record lows.

As white hot as things are now, the risk of a “downside” surprise is at its apex with all 10 states posting year-over-year declines in jobless claims. If the breadth-alizer’s reading falls below five states, the status quo gets shaken and stirred. This moment will unsettle markets more than in prior cycles given claims’ volatility in the Top 10 has been unusually stable in the current cycle.

A ‘normal’ environment entails ISM New Orders running hot and cold. The near-comatose run may have something to do with this cycle’s backdrop of slower growth and lower productivity. Need it be said: Enter the trade war.

Did someone mention that one-in-eight jobs in manufacturing behemoth Germany are tied to the auto industry? It’s too convenient that Daimler cut its profit outlook on the back of escalating US/China trade tensions. The German bellwether claims that Chinese customers will buy fewer SUVs following the tariffs slapped on US auto imports…from Alabama. (That’s state #9 if you’re keeping score.)

What state is next up in the crosshairs? How about BMW which exports vehicles to China from its South Carolina (#10) plant.

Worried speculation will bleed into the remainder of the top 10: #8 Wisconsin, #7 Kentucky, #5 Michigan and #1 Indiana fill out the auto industry’s traditional Midwest footprint.

Is there a trade to put in place? Always. Short the autos and go long jobless claims. The auto sector is at huge risk from this escalated point on. The squeeze will be brutal. Higher tariffs on export sales will squeeze the top line while spiking steel and aluminum prices smoke bottom lines. What choice will automakers have but to go on the defensive and protect their balance sheets? How is this best accomplished? By cutting the biggest cost, of course. If you’ll allow a fill in the blank on your behalf: Labor costs are on the factory line.

Wishing you well,

Danielle & The Quill Team / quillintelligence.com

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