Where The Economy Stands For 2018

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The market has certainly gotten a bit rocky. They say November is historically a strong month for the markets. That's mostly because funds are cleaning up their positions and taking new positions. That buying tends to be bullish.

I track labor metrics to understand the breadth and depth of the economy. More hiring by more companies means solid economic growth.

There's a chart I put together which expresses the relationship between Jobless Claims and US GDP.

First, let me explain the concept - because I created it and it's not widely known.

The premise is basic - companies hire and fire based on their business activity compared to the prior year. If Acme did $1 million (M) in business last year and they expect to do $1.1M this year, then they hire more.

Next, I take that year-over-year (yr/yr) measurement in Initial Jobless Claims.

When this year's claims are below last year's then the economy is expanding. Turned around, when companies are firing fewer workers, it's because they have more business.

But there's a threshold level. Historically, when that yr/yr gap is >5%, the economy is growing.

Once that gap shrinks to <5%, economic growth is about to flatten. When that gap disappears altogether and more people are being fired this year versus last year, then growth is contracting.

Now, that's a rule of thumb. And there are some nuances. But the chart is very revealing.

The most important nuance to take note of is breadth: how many States are in the 5% zone.

For example, a hurricane can push up claims and make that headline Jobless Claims figure a problem.

So I measure how many States have a y/y claims level that is >5%.

And this is what I see:

Look at the run-up to the recession in 2007. The tipping point came in late 2016 when we started to see that the minority of States continued to have Jobless Claims below the prior year (technically at least 5% below the prior year).

In Q1 2017, that figure crashed. Barely 1/3 of US states were below the prior year. Put differently, by Q1 2017, a clear majority of US States had a rising number of Jobless Claims compared to the prior year - and that meant State-level recessions were underway.

The line in the chart reflects the GDP - which confirms the signal strength behind this Jobless Claims metric.

Now look at 2015-16. The US was heading towards a recession.

Post-election, the signal has reversed. And it's even better in Q4 2017.

We have broad strength now.

I remain a bit concerned as we head into Q1 2018. Claims are ~240K and, frankly, that's where they were in 2017.

In other words, in a few months, we will see no gap between this year's claims and last year's. And that's a signal for a recession.

And while a tax cut is promising, note that Obamacare sits at the heart of the proposals.

Any hit to Obamacare is recessionary - much of the last three year's of growth has come from Federal government healthcare subsidies.

Never mind the accounting and financial engineering that turns government debt into GDP. The real issue is more basic: take away those subsidies, and the healthcare industry will layoff workers.

Key Takeaway: We have broad strength in the economy now as indicated by the chart laid out above that overlays GDP vs Jobless Claims. However, there's a concern heading into 2018. For now... things are okay.

Andrew Zatlin

Editor of Moneyball Economics

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