Investors have been on the lookout for a weakening labor market since the Federal Reserve embarked back in March 2022 on its most aggressive campaign of interest rate hikes since the 1980s.
Now, one prominent economist is seeing signs that mass layoffs have finally begun, which could soon be reflected in key economic data series that are closely monitored by the market.
Data collected in accordance with the Worker Adjustment and Retraining Notification Act — better known as the WARN Act — has shown an increase in companies giving advance notice to employees about pending plant closures and layoffs, said Torsten Slok, chief economist at Apollo Global Management, in emailed commentary.
Slok used a simple statistical model to project that rising layoffs will soon manifest in weekly jobless claims data, which tracks the number of Americans applying for unemployment benefits on a weekly basis.
“Running a regression using WARN notices to predict unemployment shows that initial jobless claims in October will rise over the coming weeks to a level between 250K and 300K,” Slok said.
APOLLO
Such an increase would be difficult for Wall Street to ignore. According to the latest available data, the number of Americans who applied for unemployment benefits during the week before last rose slightly to 207,000, but otherwise remained near pandemic-era lows.
That came on the heels of monthly data from the Labor Department showing the U.S. economy added 336,000 new jobs in September, far surpassing the forecast of 170,000. While the pace of wage growth, seen as a key input into inflation, slowed, jobs data from prior months were revised higher, breaking a streak of downward revisions.
The data were interpreted by some economists as supporting the notion that the Fed will succeed in guiding the U.S. economy toward a “soft landing,” one where they manage to tame inflation without significantly disrupting the labor market and economy.
Any sign that layoffs are beginning to mount could materially impact investors’ expectations about where the U.S. economy is headed, which in turn could impact markets, particularly the markets for Treasurys and stocks.
The S&P 500
SPX
has rallied nearly 14% in 2023, but the large-cap benchmark has set back since its late July high as Treasury yields moved quickly higher. The Dow Jones Industrial Average
DJIA
is up 2.5% in the year to date.
Historical data shows that layoffs tend to snowball once they get going. Claudia Sahm, an influential former Fed economist, used this pattern as the basis for what’s known as the Sahm Rule.
The rule is relatively straightforward: it’s triggered when unemployment jumps 50 basis points from its 12-month low, and was intended to be an early indicator for policy makers to help them act more swiftly and aggressively to support the economy and workers.
Many large employers are required by the WARN Act, which dates back to the late 1980s, to give 60 to 90 days of notice of impending mass layoffs to workers and state governments. The data cited by Slok was based on an estimate from the Federal Reserve Bank of Cleveland.
