Have We Hit a Peak in the Job Market?

More signs that the job market is getting pretty tight came out when Netflix Inc. (NASDAQ: NFLX) announced unlimited maternity and paternity leave for its employees for one year following birth or adoption. This was shortly followed by Microsoft Corp. (NASDAQ: MSFT) with a similar announcement expanding its own maternity/paternity leave policy to 12 weeks paid. What this signals is intense competition for labor in the tech sector.

Couple that with the stellar ISM non-manufacturing index numbers representing the expanding service sector across the country that came in at the strongest level since 2005, and employment sure looks healthy.

The thing with the job market though is that the chart of the unemployment rate since 1948 very closely resembles the movement of the Volatility Index (VIX). Unemployment has never “crept up” on the economy. It has always sprung up quickly and by surprise after clocking in a cycle low. Spikes in unemployment usually reached full speed around the September/October months and typically lasted between one and two years before reaching a peak. By contrast, the period from peak unemployment to trough has typically stretched from between four to eight years.

We are now almost six years from the last peak in unemployment, which occurred in October 2009 at 10%. We are only 1% away from the last trough in 2007. We are also within only 1.5% of the lowest unemployment rate of since April 2000 when unemployment hit 3.8%, the same month that weekly initial jobless claims hit their trough. Before that, the last time unemployment was below 3.8% was way back in 1968.

Unfortunately, unemployment figures do not have a history of getting low and staying there. They tend to find a trough and quickly reverse, a process that has proven to take about a year to play out.

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Initial claims come out at 8:30 a.m. EST Thursday. Any number below 266,000 will indicate the trough is not yet in and there is still time for the job market to tighten further, though estimates are 275,000, indicating the possibility is small. The unemployment number comes out August 7, with estimates calling for an unchanged figure at 5.3%.

Investors should watch these two numbers to help determine if we have reached peak jobs for this business cycle, or if there is still more room to run.