How Is the Labor Market Strengthening?
The Department of Labor’s June Employment Situation Report showed the headline unemployment rate had fallen to 6.1 percent — a nearly six-year low — thanks in part to the 288,000 jobs created by U.S. employers that month. With that monthly gain, employers have added a monthly average of almost 231,000 jobs so far this year, and if that pace can be sustained, 2014 will experience the highest level of job creation since 1999.
In recent months, especially April, the jobless rate has ticked down generally because large numbers of Americans have given up the job hunt and dropped out of the labor force, which is the basis for the unemployment calculation. However, the unemployment rate dropped by two percentage points in June because 325,000 fewer people were unemployed and 407,000 more people had jobs, not because more job seekers had given up their search. With ongoing improvements in emerging unemployment, it would be easy to describe the labor market recovery only in positive terms.
Thursday’s jobless claims report — which serve as a proxy for layoffs — from the Labor Department also fits within the strong recovery narrative. In the week ended July 19, the number of Americans filing initial applications for unemployment benefits declined by 19,000 to 284,000 — the fewest since February 2006 and lower than economists expected. Last week’s decline is of interest to economists not only for its broad implications for the jobs recovery, but because July often sees volatile claim numbers due to shutdowns at automobile manufacturers. Last week’s decline in applications for unemployment benefits came even as states reported that jobless claims data did not show any inconsistency with prior years. But it is difficult for the government to gauge the timing and the extent of auto factory closures, meaning it will take several weeks for the data to stabilize enough to signal whether layoffs are actually decreasing as significantly as these numbers suggest.
Was This Week’s Jobless Claims Report Good or Bad?
“Today’s jobless claims data likely informs us more about production than employment,” Renaissance Macro Research economist Neil Dutta wrote in a research note obtained by Bloomberg. “Auto production is in overdrive at a time when factories are normally shutdown to retool for new makes and models. We would expect a significant pick-up in motor vehicle production and manufacturing employment in July.” As RBC Capital Markets economist Tom Porcelli concluded, “the broader trend is definitely one for improvement” even if “there’s an asterisk that needs to be assigned to this number, and that’s broadly true for claims in July.” Porcelli’s asterisk being the abnormal surge in auto production.
Other evidence of labor market strength came in the form of the Labor Department’s four-week moving average. Jobless claims provide the first look at the employment situation for any given month, but since the weekly figures can be volatile, economists use the four-week moving average to understand wider trends in employment, which are far more telling of labor market health than weekly readings.
Alongside the drop in weekly jobless claims, the moving average fell from the previous week’s upwardly adjusted 309,250 to 302,000 — the lowest level recorded since May 19, 2007. At this time last year, the four-week moving average stood at 344,750 and the number of workers continuing to draw unemployment benefits dropped as well, falling by 8,000 to a seasonally adjusted 2.5 million in the week ended June 12. Continuing claims — reported with a one-week lag — are now at the levels last recorded in June 2007.
Fewer jobless claims indicate that employers are experiencing stronger sales, and are therefore more confident in the state of the economy and more willing to maintain staffing levels. Fewer jobless claims also mean that the labor market is tightening, and a tight labor market allows for wage growth and greater consumer spending, which accounts for almost 70 percent of the U.S. economy.
What Do Current Labor Market Trends Mean?
Before the Great Recession, weekly applications for unemployment benefits averaged approximately 320,000 due to the normal churn of the labor market, and for a majority of 2014, claims have fallen near that level. At this time last year, claims stood at 343,000. Declining jobless claims highlight the fact that emerging unemployment is returning to acceptable levels. Or, in other words, fewer Americans are being laid off, even if the nation’s long-term unemployment level remains elevated and the labor market retains some recession-era scars.
But while jobless claims have never stabilized below the key benchmark level of 300,000, the generally downward course charted by application numbers is evidence of ongoing healing in the labor market. The ongoing declines in emerging unemployment is evidence that June’s strong payroll numbers were no fluke, and that hiring will continue to be strong. As MFR chief U.S. economist told The Wall Street Journal, based on “historical relationships,” the current level of jobless claim applications is consistent with monthly job creation of 250,000 or more.
But the jobless claims measure calculated by the Labor Department’s Bureau of Labor Statistics is what is known as a low impact indicator compared with its monthly Employment Situation Report. While the general downward trend in jobless claims can be termed as a positive sign for the labor market, jobless claims numbers are a leading economic indicator, and therefore only offer indirect clues about the pace of hiring — the most important part of the labor market story. If initial claims for unemployment benefits defined the whole labor market story than the narrative of the jobs recovery would be easy to summarize: progress is steady, or at least, the labor market situation is not worsening.
As jobless claims continue to decrease, the labor market will further tighten, meaning employers will theoretically be under more pressure to boost wages. Typically, initial jobless claims wane before employment growth can accelerate. Of course, initial applications for unemployment benefits have been trending down for more than a year, but hiring gains have been far less consistent.
It is an indisputable fact that the 288,000 jobs U.S. employers added to payrolls last month is good news, and it is encouraging that the unemployment rate is well below the 7.9 percent rate with which the United States began 2013. But still, even though “the economy continues to improve, the recovery is not yet complete,” as Federal Reserve Chair Janet Yellen said in a congressional testimony last week. “Significant slack remains in labor markets,” meaning there are significantly more people willing and capable of filling a job than there are open positions to be filled. Despite the recent job gains, Fed economists believe the dropping unemployment rate overstates the health of the labor market; underemployment remains high, the jobless rate is still historically elevated, and the labor force participation rate is historically low. Just 63 percent of Americans are in the labor force, meaning the have a job or are looking for a job.
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