Jobless claims may signal the end is near

I have done my part over the past few weeks to write that I thought jobless claims signaled the potential for recovery.  I started the drumbeat in late March.  Here are the posts:

So I think it pretty clear that I believe we are seeing a peak here (the Chrysler and potential GM bankruptcies clearly being the worry).  So, rather than beat a dead horse this week, I am outsourcing my message to Robert Gordon.  He is an Economics Professor at Northwestern University. He also sits on the committee at the National Bureau of Economic Research (NBER) which decides the official dates of recession in the U.S.  Below is what he had to say to Kelly Evans at the Wall Street Journal.

Another week and another encouraging sign: The Labor Department’s tally of new claims for U.S. unemployment benefits, released this morning, fell by 14,000 last week to a level of 631,000. This is still a high level, of course, but the four-week average of new claims — which smooths out weekly volatility — also declined, to 637,250.

The four-week average is being very closely watched by economists right now, given this simple series has historically had impressive power for predicting when recessions are coming to an end.

As we noted a couple weeks ago, Robert J. Gordon, an economics professor at Northwestern University who sits on the committee tasked with dating recessions, is one who finds enormous value in this series. Going back to the late 1960s, he has found that the four-week average of new claims peaks about a month before the declared end of recessions with remarkable accuracy.

As of right now, the four-week average claims series peaked at a level of 659,500 in the week ended April 4. If that number holds, based on the series’ past performance it would mean the recession ended somewhere between late March and early May — a far more optimistic read on the economy than any consensus forecast (the latest WSJ survey of economists shows on average they expect the recession to end in September). “The end of the tunnel may only be weeks away,” says Mr. Gordon.

Of course, the length and depth of this recession — which began in December 2007 — could mean the series doesn’t have as much predictive power this time around. It also won’t be clear for many months when the recession actually has ended, because even if signals coming from the data improve, the National Bureau of Economic Research’s dating committee, of which Mr. Gordon is a member, likely won’t declare an “official” end for quite some time. For example, the committee didn’t pinpoint December 2007 as the starting date of the current recession until a full year later.

And meanwhile, the government’s data also contained an increasingly worrisome piece of information: The total number of workers receiving jobless benefits jumped to nearly 6.3 million for the week ended April 18, a far higher figure than has been previously recorded by the Labor Department. With such high levels of workers on jobless rolls, it could keep a lid on any hopes for a recovery, particularly as the unemployment rate, now 8.5%, is expected to hit double digits.

So, jobless claims are definitely a number to watch as we head into the spring and summer. Absent claims numbers averaging 700,000 by mid-to-late summer, it will be safe to say, we are on the road to recovery. What kind of a recovery we get is another entirely different question.

Jobless Claims Continue to Signal End Is Near – Real Time Economics, Kelly Evans, WSJ

  1. Edward Harrison says

    jake, later today or tomorrow, if I have the time, I will post the claims serious versus recession. What one is going to see is a peak in initial claims before recession ends and a peak in continuing claims after claims end. Continuing claims is analogous to the unemployment rate and initial claims is analogous to the change in that rate.

    And the change in the unemployment rate is also a leading indicator while the rate itself is lagging:

    So, if this pattern still holds (i.e. that companies continue to cut workers even after the bottom has been reached) then we should expect continuing claims to continue up.

    I would be pretty suspicious, though if continuing claims kept rising for more than two months. So, by mid-summer, the trend should be clear.

    1. jake says

      i agree the rate is lagging, while the change is leading. however, if the number of people laid off is > than the number of people rehired into the workforce, the rate will continue to rise.

      in numbers terms, if the number of people laid off drops from 630,000 to 500,000 (a substantial drop), the unemployment rate can still grow if any of the following two things happen (all else equal):

      i) the population is growing
      ii) the number of people rehired + fall out of the workforce < 500,000

      1. Edward Harrison says

        But, isn’t that always the case in a recovery (or a fake recovery a-la 1981). I mean, at the end of the cycle, firms are not hiring so the claims numbers pile up. But at some point, they stop firing people at the same clip. So, while continuing claims and the unemployment rate are still increasing, initial claims are not.

        I am still of the view that watching the unemployment rate is a losing proposition if you want to make any money on the turn. By the time unemployment turns down, the rally is either over or well underway. And the same goes for businesses looking to gauge future plans. Waiting is going to cost you money.

        I’ll have to do that graph to show you what I mean.

        1. jake says

          definitely post / send me that graph…

          if this is beating a dead horse, my apologies, BUT

          initial claims are ONLY new jobless claims filed by individuals seeking to receive state jobless benefits, thus only those people that have been fired.

          continuing claims take into account those people that have already been fired for at least a week and continue to receive state jobless benefits.

          thus, if firms are firing people less, but hiring by a smaller amount than that… continuing claims can rise even though initial claims fall

          1. Edward Harrison says

            No problem, Jake. I may not even need to post because of this post over at VoxEU: Green shoot or dead twig: Can unemployment claims predict the end of the American recession?

            I may still at my contribution, but this is a good post by them on the issue.

  2. jake says

    Ed- I can understand why the 4-week moving average for initial claims was historically a leading indicator of an economic bottom, but doesn’t that need to correspond with the hiring of those that had previously been laid off? In other words, the total # of unemployed is what is relevant and while that has historically correlated with initial claims, it has diverged this go around…

    This time things are different…

    Those individuals alrady unemployed, have remained unemployed FAR longer than past cycles, hence the reason why continuing claims continues to grow (even while initial claims flatten). Until that reverses, even with a decrease in initial claims, unemployment rates will rise…

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