Unemployment claims lowest in 15 months
Unemployment claims dropped dramatically to 466,000 this past week. This is the best data on the unemployment front we have seen in a long time. The prior week’s claims were also downwardly revised for the first time in a while. These changes brought the widely followed 4-week average down to 496,500, the first time we have been below 500,000 in 12 months. All around, this was a welcome pre-Thanksgiving report.
Claims had been holding stubbornly high in the 530,000 range in September and October. Since that time they have declined, but not quickly enough. Last week, I reiterated that I had thought seasonal adjustments were overstating initial jobless:
All of the numbers above are seasonally-adjusted data. But, I tend to think they overstate the number of job losses (this particular point puts me somewhat at odds with David Rosenberg). My reason is simple: we are in the recovery part of the business cycle, which means that any seasonal adjustment bias will tend to elevate the numbers.
But, I was beginning to doubt whether the downshift in claims I expected was going to materialize. Now that this downshift has indeed occurred, let’s see if it it holds through the holiday season. If it does, I do not expect an unemployment-based double-dip due to weakness in the household sector. This has been my baseline for sometime. In October, in another post on jobless claims, I outlined my thinking:
Initial claims are not coming down fast enough to rule out a double dip recession.
I see this period through early December as critical for the economy and jobless claims will be a key signpost. Right now we are in a weak recovery: jobless claims are coming down, retail sales (ex-autos) have stabilized, inventory levels are incredibly low. All of this points to an economy poised for a rebound. However, employment indicators are still lagging. With the holiday season upon us soon, the moment of truth will arrive. In the next couple of months, two things will happen.
- Seasonal adjustments on jobless claims data will spike up through January. That means there will be more layoffs due to seasonal patterns. Because jobless claims are in cyclical decline, this sets up situation in which the adjustments could really cause a surprise downswing in claims. The week ending December 5th when the adjustment factor hits 140.2 is the week to watch.
- Holiday retail sales will be critical to post-Holiday layoffs. Some retailers see the holiday season as a make-or-break. Last year, there were lots of stories about retailers waiting until after the holiday season to shut down stores and end leases. Is this what we should expect if holiday sales are poor? If so, there will be a concomitant rise in jobless claims which would put the recovery in jeopardy.
Overall, as the jobless claims series is published weekly, it is the best real-time gauge of how the recovery is progressing and it bears watching closely.
So, we should watch retail sales for clues to how this progresses. Black Friday in two days will be the first data point.
Not to end things on a sour note, but the specter of federal government spending cuts and/or tax increases is what has me anticipating a double dip recession. I did think we would avoid a double dip because of much of the thinking I just outlined. But I switched to a double dip just last week. The reason was the Obama’ Administration’s renewed emphasis on deficit control. Rather than debate the merits of this shift in policy, I want to outline what it means for the economy over the medium term.
When Fiscal Year 2011 begins this summer, states and municipalities will have gaping holes in their budgets – and this is not just in California or New York, but across the U.S. These holes cannot be filled without increased taxes, decreased spending or federal government transfers. So, a downshift in aggregate demand is coming from local and state governments irrespective of what the Obama Administration does. However, since they have shifted to a deficit hawk position, we should expect policies from the federal government which will further decrease aggregate demand. In an already weak economic scenario, I expect this to lead to a double dip recession.
Nevertheless, for now the latest news in the jobs picture is good and that’s what where I want to focus my energy this Thanksgiving.