Investors have been closely monitoring the labor market for signs of weakness ever since the Federal Reserve initiated an aggressive campaign of interest rate hikes in March 2022, reminiscent of the 1980s. Now, a prominent economist believes that mass layoffs have finally begun, and this could soon be reflected in key economic indicators.
According to Torsten Slok, the chief economist at Apollo Global Management, data collected through the Worker Adjustment and Retraining Notification (WARN) Act reveals an increase in the number of companies providing advance notice to employees about pending plant closures and layoffs. Slok utilized a statistical model to project that these rising layoffs will soon be evident in the weekly jobless claims data, which measures the number of Americans applying for unemployment benefits on a weekly basis.
Based on his analysis, Slok predicts that initial jobless claims in October will rise over the following weeks, reaching a level between 250K and 300K. Such an increase would undoubtedly capture Wall Street’s attention. The most recent data shows a slight rise in the number of Americans who filed for unemployment benefits last week, reaching 207,000 but still remaining close to the lows seen during the pandemic.
These developments come on the back of a monthly report from the Labor Department, which revealed that the U.S. economy added an impressive 336,000 new jobs in September—far exceeding the forecast of 170,000. Although wage growth, a crucial factor in inflation, slowed down, the data from previous months were revised upward, breaking a trend of downward revisions.
Key Details: Fed’s Efforts for a Soft Landing
The recent data has been interpreted by economists as a positive indication that the Federal Reserve (Fed) will successfully guide the U.S. economy towards a “soft landing.” This approach aims to tackle inflation while minimizing disruption to the labor market and overall economy.
Impact on Investor Expectations
The mounting number of layoffs could have a significant impact on investor expectations for the future direction of the U.S. economy. Consequently, this can affect various markets, particularly Treasurys and stocks.
Performance of Stock Indices
Although the S&P 500 (SPX) has experienced a rally of nearly 14% in 2023, it has faced setbacks since late July due to the rapid increase in Treasury yields. On the other hand, the Dow Jones Industrial Average (DJIA) has shown a modest growth of 2.5% in the year-to-date period.
The Sahm Rule
Claudia Sahm, a highly influential former Fed economist, developed a rule known as the Sahm Rule. This rule is based on historical data, indicating that layoffs tend to snowball once they begin. Its purpose is to act as an early indicator for policymakers, prompting them to take swift and aggressive action to support the economy and workers.
The trigger for the Sahm Rule occurs when unemployment rises by 50 basis points from its 12-month low.
