INDICATOR: March Job Cuts/Weekly Unemployment Claims
KEY DATA: Job Cuts: down 11% (from February); Up 30% (from March 2012)/Jobless Claims: 385,000 (up 28,000)
IN A NUTSHELL: "Recent weakening in the job numbers may be hinting that the expected tax increase/sequestration slowdown is starting."
WHAT IT MEANS: Tomorrow we get the March job numbers so this discussion may turn out to be premature, but there is some disturbing but not unexpected trends appearing in the labor market numbers. Challenger, Gray and Christmas reported that announced job cuts, while down over the month, rose sharply from the previous year's levels. This was the fourth month out of the last six where there was a year-over-year increase. That is not the direction we would like to see job cuts go. The layoff announcements were greatest in retailing and finance. While we know that the financial sector is continuing to try to figure things out given changes in regulations, it was thought that the consumer was spending enough to keep retailers going. Sequestration is also beginning to hit home as government job reductions accelerated. While you cannot go directly from job cuts to unemployment claims, there is a relationship and lately the claims numbers continue to tick upward. While the claims data improved sharply early in March, all those gains have been unwound, a worrisome sign.
MARKETS AND FED POLICY IMPLICATIONS: It looks like first quarter growth was pretty decent and the labor market held in. But fraying seems to be appearing around the edges. Job cuts and unemployment claims are trending upward. It has always been my view that the impacts of both the tax increases and sequestration spending cuts are cumulative and it would take time to see how much pain they would create. The negative effects may be starting and we haven't even begun the furloughs or major defense cuts. Also, lower and middle-income households may be able to sustain spending for a while, but the income losses due to the end of the payroll tax holiday will bite as we move through the spring and summer. I have marked down my second and third quarter growth numbers sharply as I expect sequestration to last the fiscal year. While we may have moderate growth, the strong growth I expected seems to have gone with the hot wind blowing from Washington politicians. With the employment report less than 24 hours away, I don't expect investors to react too sharply to these disappointing numbers. But they are a warning that the trends may not be going in the direction we want them to and that the markets have to realize that there is no such thing as a free budget cut or tax increase.