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Sign of a V-shaped reversal towards labor market deflation (translated from deflation com)


Job data hints at another downturn. Back in April last year, after the stabilization of financial markets, attention was drawn to what kind of economic recovery could occur. Some said it was a V-shaped recovery, others a W, and still others an L. Some over-thinkers even touted square-root (√) recovery — partial recovery, significant decline, then very strong. It turned out that this K-shaped recovery took place in the real economy: the “haves” benefit from higher asset prices and the “have-nots” suffer from layoffs. The V shape was, of course, in many stock markets, but also in employment, which has rebounded sharply, at least in the US.

However, yesterday’s data on jobs showed that the recovery in employment could be reversed, and the number of initial jobless claims will be much higher than expected. As shown in the chart below, this means that the 4-week moving average number of jobless claims has been trending upward since late November. Moreover, the data on ongoing claims shows that unemployment is becoming more and more durable. This could be a hint of structural changes in the economy.

Why is it important? Well, one of the reasons the US economy has been so successful for decades is the flexibility of its workforce. Fast and effective calls to “you’re hired” or, as they sometimes say, “you’re fired,” have made US employment data a good barometer of economic health. While employees in Europe and elsewhere were laid off during the pandemic, in the US they were laid off and rehired, giving a clearer picture of the underlying economy. This is why these unemployment figures should be of concern. Unemployment appears to be on the rise again, which is significant, especially since the US is not involved in any widespread lockdown scenario such as in Europe. This is a sign that basic business confidence and conditions are weak.

Expectations for consumer price inflation are elevated at this stage, but history shows that consumer price inflation without wage inflation is rare, and with weak employment, wages will remain the same. Undoubtedly, commodity prices may have set a significant low last April and may continue to rise. In this case, we could have a rise in consumer prices and a rise in unemployment, which would lead to stagflation in the style of the 1970s. This decade has been characterized by bouts of asset and debt deflation.

We are closely monitoring employment levels in Europe and the United States. Falling asset prices and rising unemployment will be a clear sign of impending deflation.translation from here

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