By Jeffry Bartash
When layoffs surged in the spring and summer, the U.S. economy showed early warning signs of recession. Except, it turns out, there was no surge in unemployment.
What’s to blame for the mistaken impression of rising job losses? It’s not a sexy or dramatic answer, but the culprit is the government’s faulty “recipe” for calculating the number of layoffs.
It’s a problem that’s cropped up repeatedly on critical reports on hiring, job losses, U.S. growth and other snapshots of the economy. More on that later.
At the time, however, no one could be faulted for thinking the worse.
The number of people applying for unemployment benefits jumped to a nine-month high of 261,000 by July from a 54-year low of 166,000 in March.
The increase in new claims was accompanied by a rising number of reported layoffs by companies such as Ford /zigman2/quotes/208911460/composite F -0.75% and Peloton /zigman2/quotes/208035743/composite PTON -3.56% . Technology giants such as Facebook /zigman2/quotes/205064656/composite META -6.79% and Google /zigman2/quotes/205453964/composite GOOG -2.56% also signaled plans to reduce or even freeze hiring.
To top it off, the Federal Reserve had just raised a key U.S. interest rate for the first time since 2018 to try to slow the economy and squelch high inflation, a strategy bound to throw more people out of work.
Typically a large increase in new jobless benefit claims in such a short period foreshadows a softening economy — if not outright recession.
The problem is, the government’s approach to calculating jobless claims got it wrong. There really wasn’t a big wave of people losing their jobs.
“The bigger picture here is the feared surge in layoffs earlier in the summer just didn’t happen,” said chief economist Ian Sheperson of Pantheon Macroeconomics.
The now-mysterious surge in new claims, it turns out, stemmed from the government’s faulty formula for making so-called seasonal adjustments.
A process gone wrong
We don’t want to bore readers with economic mumbo-jumbo, but stick with us.
The purpose of these adjustments is to eliminate the occasional freakish number in major economic reports and make it easier to figure out the real trends in the economy.
Take the annual surge in jobless claims in January, as seen in the accompanying chart. It happens every year as companies lay off temporary workers hired for the holiday shopping season.
Anyone looking at the surge in layoffs might think the economy is headed for trouble, but rarely is that the case. Typically layoffs soon subside.