U.S. Jobless Claims Lowest in Nearly Four Years

Claims for jobless benefits last week dropped to the lowest level in almost four years, pointing to an improvement in the U.S. job market that may help bolster spending in the new year.
Applications (INJCJC) for unemployment insurance payments plunged by 50,000 to 352,000 in the week ended Jan. 14, less than forecast and the fewest since April 2008, according to data from the Labor Department issued today in Washington. Other reports showed consumer prices were little changed in December for a second month and builders started work on the most single-family houses in more than a year.
Jobless claims, which tend to be volatile week to week around holidays, have trended down over the past month, a sign employment may pick up after payrolls grew by 200,000 in December. Gains in incomes, combined with less inflation, will probably underpin household spending, which accounts for about 70 percent of the world’s largest economy.

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Several months ago we published a report called A Simple Relationship Souring where we discussed a breakdown in the relationship between jobless claims and payroll growth. In particular we noted that the breakeven level on jobless claims – the level of claims consistent with positive payroll growth – has likely risen. New research from the Federal Reserve Bank of St. Louis1 comes to a similar conclusion.

The Federal Reserve Bank of St. Louis comes to three key conclusions:

1. The researches found that the current threshold – the particular level of claims associated with an improving labor market (faster job growth andfalling unemployment) or a faltering labor market (declining job growth and rising unemployment) – for jobless claims are 400,000. That is consistent with the current rule of thumb estimate many analysts quote.

2. The report find that the claims threshold varies significantly over time. The researches note that the varying threshold is a function of changing labor market dynamics driven by changes in potential output, population growth, and labor force participation rates. For example, from 1957 to 1975, the threshold averaged about 318,000. That was similar to the average from 1995 to 2006. However, during the period 1976 to 1994 the threshold level for initial jobless claims was 474,000.

3. Lastly, the report found that there is a high negative correlation between monthly employment changes and the difference between the actual level of initial claims and the threshold estimate. Or in other words, when claims rise above the threshold level, employment growth slows or falls and when claims fall below the threshold level employment growth accelerates or turns positive.

As we noted in A Simple Relationship Souring the recent threshold level of initial jobless claims has probably risen since the end of the recent recession. See the chart of the day. The bottom line is that while the breakeven level on jobless claims has probably risen. Our advice to investors today is to not fixate over the level of jobless claims, but the general direction. Over, the last 12 months jobless claims have been moving sideways. That suggests that employment growth will not accelerate meaningfully in the near term. Looking farther ahead, our forecast assumes a slowing in economic growth in the second half of this year and that is why we’ve penciled in a slowing in payroll growth.

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sawyerloggingon said:

There are so many people who are not counted as unemployed because they have stopped looking for work that these numbers are meaningless. When the economy improves it will be marked by a sharp uprise in unemployment as discouraged unemployed start applying for newly created jobs.

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