An improvement in jobless claims

The United States Department of Labor announced this morning that its weekly jobless claims data has improved.  Specifically the data show that the number of people filing for new unemployment benefits fell by 36,000 last week to a level of 383,000.

Because this data is notoriously volatile, and is also estimated (which you can tell because the numbers are round), a four-week moving average is calculated to smooth the gyrations of the jobless claims.  That number, a much more important figure, shows a drop of 16,000 new claims to a level of 415,000.

Lastly, last week’s data were revised slightly upward by 4,000 to a level of 419,000.

Analysis: This week’s data is important because the total number of initial claims has once again fallen below the 400,000 level.  Economists usually regard this as an important threshold.  Any claims above that are a drag to the total unemployment rate, and any number below that indicates that the unemployment rate is falling.

Sound thinking lies behind this belief.  You see each and every month there are two unemployment dynamics which any economy has to absorb.

1.  A natural rate of unemployment.  Even in boom times there are people who lose their jobs or who leave their jobs.  There are always going to be bad fits between employer and employee and those job losses result in jobless claims.  Next, those who leave their jobs may do so because they want another, different type of work.  It could be that they quit their jobs to deal with a pregnancy and the subsequent natal care.  It could be that they retire.  And so forth.  Consequently, there will always be some proportion of a labor force that is not working.  So an economy has to deal with these flux employment situations.

2.  Every single month there are new entrants into the job pool.  Think: college graduates, high school kids looking for summer jobs, stay-at-home parents wanting work, etc.  So for the unemployment rate to drop any economy has to be able to absorb this natural flow of people entering the work force.  These types of job seekers are always present and always applying upward pressure on the unemployment rate.  In a post-recessionary situation there are also all of those folks who are looking for work to replace a job they lost during the recession.  Clearly these job seekers create upward pressure on the unemployment rate, too.

So there is a magic number of jobless claims, widely believed to be 400,000, where the economy is in absorption mode.  That is, when jobless claims are below 400,000 the number of new jobs being created is soaking up excess unemployment.  Does this make sense?

Today’s jobless claims number is therefore an important milestone.  This marks the second time since the Great Recession ensued that jobless claims data has fallen below the 400,000 level.

Now what is needed is consistency in the data.  I wrote last week that the unemployment data was clearly in transition because the data frequently contradict themselves.  But I also wrote that all of the unemployment rate data revisions were upward.  What would be nice though is a solid vector.  A force of will all in the positive direction.  And so far that has been missing.

Once we have a consistent drop in the unemployment rate then we there will be more money in the pocket of consumers.  Then consumer spending will rebound more strongly.  And that will mean that gross domestic product (GDP) has finally improved and stabilized and is poised for real economic growth once more.

Importance grade: 9; that the jobless claims have fallen significantly below 400,000 is a very good thing.

Jason