U.S. Economy: Are Falling Jobless Claims Evidence of Future Strength?

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Initial applications for unemployment benefits remain near pre-recession lows, and that fact signals to economists that the U.S. economy is primed to gain momentum in the later half of this year. Data released Thursday by the Department of Labor’s Bureau of Labor Statistics showed that jobless claims dropped by 14,000 applications to 289,000 in the week ended August 2. By comparison, 335,000 Americans filed jobless claims at this time last year. Before the Great Recession, weekly applications for unemployment benefits averaged approximately 320,000 due to the normal churn of the labor market, and even though jobless claims have failed to stabilize below 300,000, applications have been trending lower so far in 2014. Analysts even expected claims to come in above that level, with economists polled by Reuters expecting applications to rise to 305,000 last week.

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Jobless claims — which serves as a proxy for layoffs — fit within the strong recovery narrative crafted by job creation in the past several months. July saw solid growth, if it was lower than the previous several months. Employers added 209,000 jobs, ensuring that July was the sixth consecutive month in which job creation surpassed the key benchmark level of 200,000. And, as recent jobless claims numbers prove, emerging unemployment, as compared to long-term unemployment, is returning to acceptable levels. Or, in other words, fewer Americans are being laid off, even if long-term unemployment remains elevated and the labor force participation rate stands near record lows.

The connection between job growth and economic output seems relatively simply.When more people are employed, consumers have more cash at their disposal, meaning more money is being spent and businesses hire more employees to keep up with the greater demand. However, when and how gross domestic product and job growth are measured complicates their relationship. And indeed, relatively solid job growth towards the end of the first quarter prompted, in part, Department of Commerce economists to upwardly revise growth from a 2.9 percent contraction to a 2.1 percent contraction. But it is important to remember that the headline GDP number is not a leading indicator, rather it reflects growth through a rear-view mirror. This means a high growth rate can be the result of one-time factors, while low growth could hide underlying strength. With GDP growth remaining choppy and inconsistent throughout much of the past five years of recovery, the link between the United States’ employment situation and its economic output has been loose. But the economy is correcting that disconnect.

“This is one of the early steps in the process of a really good run for the labor market,” Jefferies economist Thomas Simons told Bloomberg. “If we have fewer layoffs, it’s a necessary precondition for an acceleration in hiring, and as hiring increases and the slack in the labor force is taken up, that should put some upward pressure on wages as well.” 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. As jobless claims continue to decrease, the labor market will further tighten, meaning employers will theoretically be under more pressure to boost wages. And 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.

Still, Gallup’s U.S. Job Creation Index advanced to a six-year high in July, and for the first time since 2008, a plurality of American workers said their employers were hiring rather than cutting staff or maintaining current staffing levels. Last month’s reading of plus 28 barely exceeded the reading of plus 26 recorded in early 2008, which was not a “highly favorable time for the economy,” meaning that this critical measure of the country’s economic health still has room to improve. But it is “promising that the percentage of workers who are witnessing hiring in their workplaces has reached a new high,” noted the report, because that uptick could “help buoy workers’ economic confidence, which could in turn have a positive ripple effect on the economy.”

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In support of the assertion that the labor market is beginning a “good run,” the four-week moving average dropped. 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. Last week, that key measure dropped 4,000 to 293,500, the lowest level since February 2006.

Meanwhile, the number of workers continuing to draw unemployment benefits — a measure reported with a one-week lag — decreased by 24,000 to 2.52 million in the week ended July 26. Over the past twelve months, continuing claims have decreased by 483,000.

Federal Reserve policy makers announced last Wednesday their decision to further taper the central bank’s monthly asset purchases as the labor market continues to stabilize, even though “a range of labor-market indicators suggest that there remains significant underutilization of labor resources,” as the Federal Open Market Committee noted in a statement, meaning there is still much slack in the market. And Chair Janet Yellen told Congress early last month that despite the positive turn the economy has taken, she remains concerned about that “slack,” which manifests itself in low labor force participation and sluggish wage growth.

In July, wages barely moved, increasing by only a penny — a jump that leaves them only 2 percent higher than a year ago.

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