First-time claims for unemployment have been declining for six years, and have reached levels that are very low by historical standards. Yet the economy remains mired in its weakest recovery ever. Pessimists worry that every time claims fall to current levels another recession is right around the corner. Recession fears are fueled by weak growth, which many feel puts the economy at risk of hitting "stall speed" and slumping. But in the absence of any of the typical precursors of recession (e.g., very tight monetary policy, rising swap spreads, a flat or inverted yield curve, and valuations that imply very optimistic assumptions for future growth) I think the risk of recession remains very low.
What we have is an economy that is plodding along, burdened by high tax and regulatory burdens and hobbled still by risk aversion left over from the Great Recession. Business investment remains surprisingly weak despite record-setting profits, and investors are still willing to accept extremely low yields in exchange for the relative safety of bonds. The economy is still facing significant headwinds, growing despite the many obstacles to growth. It's not an economy that is running on fumes, it's an economy that still has lots of untapped potential. The stimulative effects of sharply lower oil prices are under-appreciated, and U.S. investors are still not fully appreciative of the recent strength of foreign equity markets (which I noted yesterday), particularly those in the Asia/Pacific region. Taking the measure of the pros and cons, I think the balance of risks is still skewed to the upside.
As these charts show, unemployment claims are very near their long-term lows in nominal terms and relative to the size of the labor force. Workers in general are less at risk of getting fired today than at almost any time in the past. At the very least this should gradually add to consumer confidence. With layoffs at such low levels, any increase in business confidence and investment should translate into increased job creation.
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