Do Jobless Claims Promise a Strong January?

Initial claims for unemployment benefits fell to the lowest level since November, reported the Department of Labor’s Bureau of Labor Statistics on Thursday. That news comes just a week after the BLS announced that the United States economy created a fewer-than-expected 74,000 jobs in the month of December, prompting some speculation that the growing momentum evidenced by the labor market in the previous two months was at an end. Yet, other economists — including Moody’s Analytics chief economist Mark Zandi — argued that the meager payroll additions were not a harbinger of a changing employment trend, but an anomaly that would be wiped away by later revisions. While evidence to support his assertion will only be available when January’s numbers are released next month, the downward trend in first-time jobless claims suggests there has been no major changes in the labor market, at least in terms of layoffs.

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Americans filed 326,000 initial claims for jobless benefits in the week ended January 11, a decrease of 2,000 from the previous week’s revised figure of 328,000. The drop is further evidence of the resilience of the U.S. labor market, and a sign that even though job creation was not strong in December, businesses remain confident enough to keep workers this month even if they were not inclined to increase payrolls last month. Economists say weekly jobless claims below 350,000-level indicate moderate growth in the labor market, trends in jobless claims, a leading economic indicator, only offer indirect clues about the pace of hiring. What is clear is that even though “the level of claims is now consistent with a healthy labor market turnover,” as BNP Paribas U.S. economist Yelena Shulyatyeva told Bloomberg, “companies are still reluctant to hire and invest.” That is the real issue. “For the economy to accelerate, we need to see acceleration in hiring,” she added.

At current levels, initial claims for unemployment benefits are nearing their pre-recession levels. In 2006, jobless claims averaged around 300,000, and even temporarily dipped below that level. But the low level of claims was accompanied by an average addition of 193,000 jobs per month during the first eight months of the year and an unemployment rate below 5 percent.

Comparatively, employers added approximately 188,550 jobs per month in 2013, a slight improvement from the 182,750 jobs added per month in 2012. More importantly, excluding December, job creation did acceleration in the later half of the year; the U.S. economy added an average of 204,000 jobs from August through November, an increase from the 159,000 jobs added between April and July. That growth suggested the labor market had taken giant steps toward a recovery, but even so, it must remember that the labor market recovery is stable not spectacular. Even with average monthly job additions of 188,500 it will still take five years and six months to close the job gap left by the recession, according to the Hamilton Project at Brookings. Plus, the unemployment rate only dropped to 6.7 percent in the past month because a significant number job hunters dropped out of the labor force.

Still, there is evidence that trends in the job market remain stable; the four-week moving average of jobless claims also 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. Last week, that average decreased by 13,500 claims to 335,000, down from the previous week’s upwardly revised average of 348,500. After all, as Mesirow Financial Chief Economist Diane Swonk told CNBC, it is “the trend in employment that matters, and the trends have been good.” Plus, and this bodes well for December’s low employment gains, the initial numbers are not as important as the revisions. “In an economy you tend to miss stuff overtime. You miss turning points,” she added. “These numbers aren’t very good at picking up turning points. They only catch it in the revisions.”’

While initial claims for unemployment benefits — which serve as a proxy for layoffs — were volatile in December, in general, jobless claims trended down for much of the year, suggesting that the long cycle of elevated layoffs that characterized the 2007 to 2009 recession has ended. Fewer layoffs mean that companies have slimmed down their workforces about as much as possible, which puts employers in position to boost payrolls should business improve. A strengthening labor market is necessary to end income growth stagnation and spur consumer spending, which accounts for about 70 percent of the U.S. gross domestic product.

Declining first-time applications for unemployment benefits and falling layoff numbers are only half of the story; they must be accompanied by increased hiring. Initial claims typically wane before job growth can accelerate. But for most of this year, employers behaved much as they did during the recession, keeping their workforces — and therefore labor costs — as low as possible. Jobless claims declined without the accompaniment of greater job growth, until October and November, when the trend of job creation changed. At the time, it seemed those economists who expected the labor market recovery to take giant steps toward the end of the year were correct.

A stronger trend in job creation begins to take shape when the monthly job reports are compared. But, as Swonk indicated, improvements in the labor market are often hard to see on a week-by-week basis. In the week ended December 28, the total number of people claiming benefits in all programs was was 4,703,499, an increase of 508,309 from the previous week. There were 5,873,824 persons claiming benefits in all programs in the comparable week in 2012. In addition, the number of people continuing to receive jobless benefits climbed by 174,000 to 3.03 million in the week ended January 1, the highest number reported since July. As for those individuals who have used up traditional benefits and are collecting emergency and extended payments, the extension of emergency unemployment insurance expired on December 28. A measure to extend emergency payments for the more than one million long-term unemployed Americans for a period of three months passed a key Senate procedural hurdle on January 6, but the Senate then failed to advance the plan as lawmakers disputed how to cover the cost of the benefits and how long they should continue.

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