U.S. Initial Labor Claims Fall Below Key 400,000 Level

Initial Claims for Unemployment Insurance finally broke below the key 400,000 level. This week they fell by 9,000, but only after the previous week was revised up by 4,000. So regardless if you count it as a drop of 9,000 or 5,000, we are still at 397,000. This was slightly better than the expected level of 404,000.

Now we just have to stay below the 400,000 level. We have been here before in the last few months, only to see the achievement revised away the next week and the subsequent weeks bounce higher. If the current level can be sustained or even improved upon (OK, that is a big “if”), this could be signaling better job growth in November and December.

We will see tomorrow if the generally lower level of claims in recent weeks has translated into job gains in October. Unemployment held steady at 9.1% in September despite net job growth of 103,000. The participation and employment rates actually ticked up for the second month in a row, but they were coming off the lowest levels since 1983 in July.

The employment report is composed of two separate surveys. The household survey was much more upbeat in August than was the establishment survey, and pointed to a gain of 398,000 jobs. However, the establishment survey is generally considered the more accurate of the two.

Track the 4-Week Moving Average

Since claims can be volatile from week to week, it is better to track the four-week moving average to get a better sense of the trend. It fell 2,000 to 404,500. Over the last year, the four-week average has dropped by 46,500 or 10.3%, and off 38% from the mid-2009 peak.

The big question is: can we get below the 400,000 level and stay there? There are a lot of pressures slowing the economy, and the forces of fiscal contraction are scheduled to become far more intense starting on New Years Day. Thus even if we do manage to continue to see improvement over the short term, we might find the better levels hard to sustain next year.

The economy is growing but very slowly, and while private sector job growth in the first nine months of this year has almost doubled the job gains of the first nine months of 2010 (1.341 million vs. 735,000), it is not enough to put a dent in the huge army of the unemployed. Those gains have been offset by a faster pace of government layoffs (267,000 vs. 211,000).

In September, the private sector created just 137,000 jobs, offset by the loss of 34,000 government jobs. The unemployment rate was unchanged at 9.1%, but the employment rate, or the percentage of the population over age 16 actually working, rose to 58.3% from 58.2% in August, the second increase in a row. The increase was good to see, but July was the lowest level since 1983, and at that point the movement of women into the labor force was not yet complete.

Tomorrow is the big day for employment data, and the bar is set pretty low. The consensus is looking for total job growth the slow to 85,000, with a contribution of 117,000 from the private sector being offset by the loss of 32,000 public sector jobs. The public sector loss looks about right to me, but I think we should probably match the private sector addition we saw in September. In any case, the unemployment rate will probably hold at 9.1%, barring a major change in the participation rate.

The first graph (from this source) shows the long-term history of the four-week average of initial claims.

We are never going to get to zero on claims, and historically have only rarely gotten below the 300,000 level, and that tends to occur in boom times. So why is the 400,000 level so significant? The next graph shows why. Historically that has been the inflection point where the economy starts to add a lot of jobs. It layers over the monthly gain or loss in private sector jobs (red line, right hand scale) and total jobs (blue line). Unfortunately the automatic scaling did not put a line at zero for the job growth line, so you will have to eyeball it a bit.

Notice the strong inverse correlation between job growth and initial claims, and how when the blue initial claims number is below the 400,000 level that job growth is strong. OK, it’s not that an increase from 399,000 to 400,000 is all that much difference than from 397,000 to 398,000 or from 402,000 to 403,000, but big round numbers are psychologically important, especially when that round number is near a historical inflection point.

Generally, we need GDP growth of over 2.0% to see the unemployment rate fall, and we got 2.5% in the third quarter. That is not over the threshold by a lot, but it is over it. There is also a good chance that the momentum carries through to the fourth quarter.

Zacks Investment Research

About vitalstocks

This is a sample profile field. Vitalstocks is the operating company for Stockbloghub. This will place the picture of the author or company in the profile. Here is another extra line of information.


Powered by Facebook Comments

Similar Posts: | | Featured

RSS feeds: economy | Employment | Featured |

Other Posts by | RSS Feed for this author