U.S. Initial Jobless Claims Fall Again

Initial Claims for Unemployment Insurance fell again this week. This week they fell by 10,000 but only after the previous week was revised up by 3,000. So regardless if you count it as a drop of 10,000 or 7,000, we are still at 390,000. That was better than the expected level of 400,000.

We are now clearly below the 400,000 level, and this is the second week in a row (well, sort of, given the revision) that we have been so. We have been here before in the last few months, only to see then achievement revised away the next week and the subsequent weeks bounce higher. We were below 400,000 in February and March and that signaled the start of much more robust job growth, such as we saw in March and April. If the current level can be sustained or even improved upon, this could be signaling better job growth in November and December.

The somewhat better levels during September did not really translate into bigger job gains in October, at least according to the establishment survey. Unemployment dropped to 9.0% but only 80,000 net jobs were created, significantly lower than the 158,000 gained in September, although that was after a very big upward revision to the September (and August) numbers. The participation rate held steady, and employment rate actually ticked up for the third 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 277,000 jobs (and over 1 million over the last three months). 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 5,250 to 400,000. Over the last year, the four week average has dropped by 44,250 or 10.0%, and off 38.5% from the mid-2009 peak.

The big question is: can we get below the 400,000 level and stay there? Well, we are right at the key level now — but can we continue to push lower, or will we once again bounce off this level? There are a lot of pressures slowing the economy, and fiscal contraction is scheduled to become far more intense starting on New Year’s Day.

The economy is growing but very slowly, and while private sector job growth in the first ten months of this year are almost double the job gains of the first ten months of 2010 (1.529 million vs. 878,000), those gains have been offset by a faster pace of government layoffs (273,000 vs. 183,000). Total employment is up 1.256 million in the first ten months versus 695,000 in the first ten months of 2010.

The graph (from http://www.calculatedriskblog.com/) shows the long-term history of the four-week average of initial claims.

So why is the 400,000 level so significant? Historically that has been the inflection point where the economy starts to add a lot of jobs. We are making progress — the four-week moving average hitting the 400,000 level is a major milestone. In the last two recoveries, when it got below that threshold, that job creation really started to take off.

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 a good chance that the momentum carries through to the fourth quarter.

However, the first quarter may not look nearly as good. Over 85% of the population are expected to be hit with a 2% reduction in after tax incomes as the payroll tax cut expires. In other words, someone earning $50,000 will be hit with a $1,000 reduction in their paycheck, and the $100,000 earner a $2,000 drop. That will reduce spending and with it, employment.

Hopefully it can be revived through Congress as a stand-alone measure, or the progress we are seeing now will quickly be reduced. It is worth noting that in last night’s GOP Presidential debate, several of the leading candidates indicated that they would support an extension of the payroll tax cut, so there is some hope that we will get at least an extension.

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