How High Gas Prices Affect the Number of Layoffs in the U.S.

How do high gasoline prices affect the pace of job layoffs in the United States?

We now have the ability to answer this question thanks to a recent break in the trend for seasonally-adjusted initial unemployment insurance claim filed each week in the United States.

Here, we note that the data for these new jobless benefit claim filings reflect major changes have occurred in the business outlook for U.S. employers making employee retention decisions some 2 to 3 weeks earlier. This time delay corresponds to the typical weekly or biweekly pay periods that most U.S. employers have, where employers allow their current pay period to run out, with any changes they might make with respect to their staffing levels being implemented at the beginning of their next pay period.

For the most recently broken trend in U.S. layoff activity, we observed that average fuel prices in the U.S. rose above $3.50 per gallon in the week between 19 March 2011 and 26 March 2011, which showed up in the data for new jobless benefits being filed in the week ending 9 April 2011, which marked the beginning of the trend. The effect on U.S. layoffs was to derail the pace of post-recession economic recovery in the United States, sending it on a much slower pace of improvement from that point forward.

That continued until the week between 5 November 2011 and 12 November 2011, when the average price of motor gasoline in the United States fell back below the $3.50 per gallon mark. As we saw before, the drop in gasoline prices below this level corresponds to a sudden improvement in the pace of layoff activity in the United States, which began improving more rapidly just 2-3 weeks later, after 26 November 2011.

The chart below shows the nine major trends we have observed in U.S. layoff activity from 7 January 2006 through 25 February 2012:

The table below describes each of these major trends, including the causal factors behind each that we have been able to identify:

Timing and Events of Major Shifts in Layoffs of U.S. Employees
Period	Starting Date	Ending Date	Likely Event(s) Triggering New Trend (Occurs 2 to 3 Weeks Prior to New Trend Taking Effect)
A	7 January 2006	22 April 2006	This period of time marks a short term event in which layoff activity briefly dipped as the U.S. housing bubble reached its peak. Builders kept their employees busy as they raced to "beat the clock" to capitalize on high housing demand and prices.
B	29 April 2006	17 November 2007	The calm before the storm. U.S. layoff activity is remarkably stable as solid economic growth is recorded during this period, even though the housing and credit bubbles have begun their deflation phase.
C	24 November 2007	26 July 2008	Federal Reserve acts to slash interest rates for the first time in 4 1/2 years as it begins to respond to the growing housing and credit crisis, which coincides with a spike in the TED spread. Negative change in future outlook for economy leads U.S. businesses to begin increasing the rate of layoffs on a small scale, as the beginning of a recession looms in the month ahead.
D	2 August 2008	21 March 2009	Oil prices spike toward inflation-adjusted all-time highs (over $140 per barrel in 2008 U.S. dollars.) Negative change in future outlook for economy leads businesses to sharply accelerate the rate of employee layoffs.
E	28 March 2009	7 November 2009	Stock market bottoms as future outlook for U.S. economy improves, as rate at which the U.S. economic situation is worsening stops increasing and begins to decelerate instead. U.S. businesses react to the positive change in their outlook by significantly slowing the pace of their layoffs, as the Chinese government announced how it would spend its massive economic stimulus effort, which stood to directly benefit U.S.-based exporters of capital goods and raw materials. By contrast, the U.S. stimulus effort that passed into law over a week earlier had no impact upon U.S. business employee retention decisions, as the measure was perceived to be excessively wasteful in generating new and sustainable economic activity.
F	14 November 2009	11 September 2010	Introduction of HR 3962 (Affordable Health Care for America Act) derails improving picture for employees of U.S. businesses, as the measure (and corresponding legislation introduced in the U.S. Senate) is likely to increase the costs to businesses of retaining employees in the future. Employers react to the negative change in their business outlook by slowing the rate of improvement in layoff activity.
G	18 September 2010	2 April 2011	Possible multiple causes. Political polling indicates Republican party could reasonably win both the U.S. House and Senate, preventing the Democratic party from being able to continue cramming unpopular and economically destructive legislation into law, bringing relief to distressed U.S. businesses. Fed Chairman Ben Bernanke announces Federal Reserve will act if economy worsens, potentially restoring some employer confidence. The White House announces there will be no big new stimulus plan, eliminating the possibility that more wasteful economic activity directed by the federal government would continue to crowd out the economic activity of U.S. businesses.
H	9 April 2011	26 November 2011	Rising oil and gasoline prices exceed the critical $3.50-$3.60 per gallon range (in 2011 U.S. dollars), forcing numerous small businesses to act to reduce staff to offset rising costs in order to prevent losses. The trend ends when average motor gasoline prices in the U.S. fall back below the $3.50 level in the week between 5 November 2011 and 12 November 2011 - the corresponding improvement in business outlook shows up in the data with the next full pay cycle (2-3 weeks later, or rather, the week ending 26 November 2011!)
I	3 December 2011	Present	With average gasoline prices in the U.S. having fallen below the critical $3.50 per gallon level, employers respond to the improving business outlook by reducing the number weekly layoffs at a faster rate, as both businesses and consumers benefit from lower transporation and fuel costs, while consumers gain more disposable income.

Using residual analysis, we can eliminate the variability associated with rising or falling general trends over time and improve our ability to both make forecasts of U.S. layoff activity and to detect changes in trends. The chart below shows the trends after accounting for those general changes:

Our final chart looks more closely at the recently completed eighth major trend ("Trend H") and the newly established trend ("Trend I"):

With average motor gasoline prices now having risen back above the $3.50 per gallon mark within the last several weeks, which proved to be the trigger point for affecting employee retention decisions at U.S. employers in 2011, we anticipate that the current trend of faster improvement in U.S. layoff activity may be fairly short lived.