Falling Jobless Claims Suggest Future Strength

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Earlier this month, when from the Department of Labor reported that the United States economy added the fewest number of workers in four months in July with the majority of the job gains coming in the low-wage retail and restaurant sector, fears that the recovery had paused or even taken a step back were reignited. But, with initial claims for unemployment benefits decreasing for much of August, economists are more convinced that last month’s disappointing 162,000-job gain was an isolated setback, not the start of a new trend.

For the week ended August 24, jobless claims dropped by a better-than-expected 6,000 to a seasonally adjusted 331,000, the Labor Department said on Thursday. Since the middle of July, initial claims have not strayed far from the 330,000 level, supporting expectations that job gains will be much stronger in the month of August. “The trend remains very encouraging,”  Moody’s Analytics senior economists Ryan Sweet told Bloomberg. “It suggests the job market is strengthening.” These applications — which serve as a proxy for layoffs — typically wane before job growth can begin to accelerate.

While jobless claims provide the first look at the employment situation for any given month, the weekly figures can be volatile, so economists use the four-week moving average to understand wider trends. Last week, that figure rose for the first time in weeks, inching up 750 to 331,250, a level economists still associate with a strengthening labor market.

Unemployed workers who have used up their traditional benefits and are collecting emergency and extended benefits rose by about 10,500 to 1.51 million in the week ended August 10, the most recent data available.

In general, economists are expecting that the pace of hiring will speed up once March’s across-the-board spending cuts have worked their way through the system at the end of the fiscal year on September 30. Once the effects of January’s tax hike and the budget cuts begin to fade, employers are expected to prepare for improved economic growth by maintaining their workforces.

While many employers have been reluctant to fire workers, they have also been reluctant to create new jobs as the economic remains slow and politicians argue over the budget, the deficit, and the Affordable Care Act.

The pace of hiring slackened last month, but a greater pace of job creation this month could give the Federal Reserve cause to announce a scaling back of its monthly $85-billion stimulus program at the central bank’s September 17 to 18 policy meeting. Chairman Ben Bernanke has already said that the central bank plans to begin reducing the stimulus later this year if the economy meets the Fed’s employment and inflation targets.

Many economic indicators — including home building and industrial production — remained weak in July, but economists believe that data will affect only the size of the Fed’s cutbacks. However, there is a disconnect to consider. Even though the current rate of job creation is not stellar, it would typically coincide with faster-growing economic output.

Despite that, the government’s initial reading of second-quarter gross domestic product showed the economy grew at an anemic annual rate of 1.7 percent, and GDP grew just 1.1 percent in the first quarter, rates that are usually considered to be too weak to bring down unemployment significantly. But, the Commerce Department’s revised estimate of second-quarter economic growth showed that gross domestic product actually grew at a 2.5 percent annual rate, an announcement that could give credence to the theory that the economic recovery is turning a corner.

Unemployment Claims 8.24.13

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