For the latest week, U.S. jobless claims hit 514,000, the lowest level since early January. This brings the widely-tracked four-week average down to 531,500, also a 9-month low. In addition, continuing claims fell below 6 million for the first time since March. All of these seasonally-adjusted data points suggest that the unemployment situation is slowly improving. My baseline scenario to date sees this improvement continuing to where initial jobless claims fall back into the mid-400s by year end so that non-farm payrolls show job gains late this quarter or early next quarter.
However, this past week saw two negative data points pop into the picture. When looking at the non-seasonally adjusted (NSA) data, the number of initial claims spiked up above 500,000 for the first time in 11 weeks. This is the normal seasonal pattern and is to be expected; however, last week’s spike caused comparisons to last year in (4-week average NSA) initial claims to tick up (42K more initial claims than last year versus 36K more the week before). Translation: 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.