Investors have been watching the job market since the Federal Reserve started raising interest rates aggressively in March 2022. Currently, a prominent economist has observed indications of potential increases in significant layoffs. These changes may soon become evident in crucial economic indicators closely monitored by the market.

Data collected under the WARN Act, which requires companies to give notice to workers and state governments before mass layoffs, show that more companies are issuing these notices. Torsten Slok, the Chief Economist at Apollo Global Management, noticed this trend. Using a simple model, he predicts that this rise in layoffs will start to appear in the weekly jobless claims data, which counts how many Americans are applying for unemployment benefits each week.

Slok says that based on his model, we should expect the number of initial jobless claims to go up in October to somewhere between 250,000 and 300,000. This is noteworthy and may draw considerable interest from the financial community. The latest data indicates a slight uptick to 207,000 individuals filing for unemployment benefits, although it remains relatively low when compared to the levels during the pandemic.

This comes after the Labor Department reported that the U.S. added 336,000 new jobs in September, much higher than the expected 170,000. While wage growth slowed down, which is important for inflation, previous job data was revised upward, ending a trend of downward revisions. Certain economists interpret this as an indication that the Federal Reserve is effectively steering the U.S. economy toward a “soft landing,” a scenario in which they manage to rein in inflation without significantly disrupting the job market and the overall economy.

If layoffs start to increase, it could have a big impact on what investors expect for the U.S. economy, which, in turn, could affect financial markets, especially the Treasury and stock markets. The S&P 500 is up by nearly 14% in 2023, but it fell back from its high in late July as Treasury yields rose quickly. The Dow Jones Industrial Average is up by 2.5% so far this year.

We’ve seen in the past that once layoffs start, they tend to keep growing. Claudia Sahm, a former Fed economist, used this pattern to create what’s known as the Sahm Rule. It triggers when unemployment goes up by 50 basis points from its lowest point in the last year and is meant to be an early warning for policymakers to act faster and more decisively to help the economy and workers.

Numerous prominent employers are obligated to adhere to the WARN Act, a regulation in place since the late 1980s. This mandate compels them to provide their workers and state governments with advance notice of substantial layoffs ranging from 60 to 90 days. The information referenced by Slok was approximated by the Federal Reserve Bank of Cleveland.