What are US Jobless claims telling us about recovery?
The US Department of Labor reported this morning that initial claims for unemployment insurance rose to a seasonally-adjusted 409,000 from an upwardly-revised 391,000. This puts the widely-followed four-week moving average for initial jobless claims at a fresh two-year low of 410,750.
This is the last piece of information we are to get before the much anticipated US Employment Situation Report is released tomorrow at 830AM ET. Here’s my take on the jobless claims numbers.
First, we are in a heavy seasonal adjustment period. The seasonal factor for this past week’s number was 141.0. Next week will see the heaviest adjustment as seasonal jobs come to an end. We won’t get a normal number until early February.
Second, that said, the trend in initial jobless claims is clearly down. The last time the 4-week average initial claims number was this low was the week ending 26 Jul 2008. This was also the last time the 4-week average was lower than 400,000, a number usually associated with recession.
Third, year-on-year comparisons are good coincident indicators of cycle shifts but have been lagging indicators during the recovery . When real GDP was down 4.9% in Q1 2009, year-on-year claims moved to their largest year on year-change of +295,750 in the week ending 7 Mar 2009. I used this to alert readers that claims were pointing to recovery in May 2009. The recession ended in June. At the time, I thought deleveraging would extend the recession through Q3 but it did not. Since then, the change in jobless claims have lagged the uptick in GDP. The year-on-year change in adjusted or unadjusted jobless claims have tracked GDP growth fairly well during the technical recovery with a lag of about three or four months. For example, the year-on-year change (in 4-week SA initial) claims hit a cycle low of –194,750 in March 2010 while GDP growth peaked in Q4 2009. Right now, the year-on-year change is –56,500 while the recovery seems to be accelerating. Bottom line: jobless claims are good recession and recovery predictors but jobs lag in a recovery, even when looking at the year-on-year or six month change.
Four, this means we should expect the relatively weak labour market in the US to continue to improve. The ADP number for private payrolls showed an historic high addition of 297,000 jobs for December. That’s a very good number. However, ADP data have diverged from the government data during this technical recovery. Nevertheless, I expect that any number under 200,000 jobs added will disappoint bond markets tomorrow. Watch the state and local government number since this is a big story for 2011.
Five, normally I look for the change in jobless claims to hit +50,000 as a double dip signal. We are a long way from there at -56K. In past mid-recovery slowdowns, we saw the number bump up to +52K in 1984, +49K in 1995, +5K in May 2006. I have been concerned about a double dip. However, for several weeks my conclusion has been that we are largely over the hump. The technical recovery will continue and form a broader multi-year recovery. Of course, balance sheet issues are large this cycle, but at this point I no longer believe they will prevent the recovery from taking hold.