Last week, I touched on the Federal Reserve’s Labor Market Conditions Index (LMCI) which has shown signs of weakness as of late. To wit:

“Unfortunately for the Federal Reserve, the index has not supported the Fed’s claims that employment is growing at a rate strong enough to withstand a tightening of monetary policy. In fact, as shown in the chart below, the LMCI index (smoothed with a 12-month average) has been a leading indicator of future weakness in employment. The recent downturn in the LMCI suggests that employment gains may more muted in the months ahead.”

Not surprisingly, I received a good bit of pushback from the “always optimistic crowd” stating that the surging levels of job openings and plunging jobless claims support continued job gains in the future. Therefore, with continued economic and employment improvement the Fed has a clear path to higher rates. 

This is not exactly true. 

Initial Jobless Claims

Let’s start with jobless claims. To more clearly understand what the current level of jobless claims are telling us, we have to understand what jobless claims actually are. 

Jobless claims are simply the number of people, by state, who are filing to receive unemployment insurance benefits for the first time.

However, in order to receive unemployment benefits an individual must have been laid off, terminated or discharged from service by their employers. Individuals who “quit” are not eligible to file claims. 

The distinction of “termination” is very important at this juncture as jobless claims, as shown in the chart below, reaches very low levels.

There is a point in every economic/employment cycle where employers exhaust the ability to “cut costs” though the reduction of the labor force. When the labor forced has been reduced to its critical operational level, businesses begin to “hoard” what labor they have, maximize the existing labor force’s productivity (increase output with minimal increases in labor costs) and hire additional labor, primarily temporary, only when demand forces expansion.