Jobless Claims Are Dropping, But How Strong Is Hiring?

“When you look at the labor market, job destruction has been very, very low,” Raymond James chief economist Scott Brown told Bloomberg Businessweek ahead of Thursday’s jobless claims report. That is the good news. Data released by the Department of Labor’s Bureau of Labor Statistics Thursday showed that first-time application for unemployment benefits decreased 20,000 to a seasonally adjusted 331,000 in the week ended February 1, the first drop in initial jobless claims recorded in three weeks. Comparatively, analysts were a expecting a much more modest drop to 335,000 new claims from the previous week’s upwardly revised average of 351,000.

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The report also contained further evidence that the downward trend in initial jobless claims will continue. 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 the week ended February 1, that average decreased by 250 claims to 334,000 from the previous week’s upwardly revised average of 333,750. 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.”

Initial claims for unemployment benefits — which serve as a proxy for layoffs — paint a picture of a strengthening and resilient labor market; the general downward trend of jobless claims offers a sign that even though job creation was not strong in December and may have been equally weak in January, business remained confident enough to keep workers last month even if they were not inclined to increase payrolls. If initial claims for unemployment defined the whole labor market story, then the narrative of the jobs recovery would be easy to summarize: progress is steady. But 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.

“It’s really been an issue of new hiring. That hiring, we think, is gradually picking up,” added Scott. Still, continuing claims have been elevated in recent weeks, a pattern economists have attributed to frigid temperatures. In the week ended January 25, the number of people continuing to receive jobless benefits increased 15,000 to 2.96 million. Meanwhile, the total number of people claiming benefits in all programs for the week ending January 18 was 3,467,640, a decrease of 115,861 from the previous week. There were 5,590,480 persons claiming benefits in all programs in the comparable week in 2013.

Of course, trends in jobless claims, a leading economic indicator, only offer indirect clues about the pace of hiring. But nevertheless, the fact that initial applications for unemployment benefits are trending near pre-recession levels is an indication that December’s weak job creation was a fluke — a product of the frigid temperatures that engulfed much of the United States that month.

In January, the Labor Department announced that the United States economy had 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 from the Labor Department. While evidence to support his assertion will only be available with January’s numbers are released Friday, 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.

Friday’s Employment Situation Report from the Department of Labor’s Bureau of Statistics is much anticipated from economists after December’s extremely weak job growth and a series recent weak economic data releases. If the report shows strong job creation, the positive outlook for the labor market recovery could be revived, but if the numbers are weak, concerns for the economy’s ability to create jobs could be renewed.

On Wednesday, payroll processor ADP reported that U.S. employers expanded payrolls by just 175,000 in the past month. “Cold and stormy winter weather continued to weigh on the job numbers,” explained Zandi, whose firm helps compile payroll processor ADP’s National Employment Report. However, “underlying job growth, abstracting from the weather, remains sturdy,” he added in the press release announcing the month’s numbers. The release also showed that December’s growth was downwardly revised to 227,000 jobs. “It’s not an auspicious start,” Zandi said on a conference call Wednesday, “but I think we’re still going to have a better year.” The economist expects average monthly job growth to increase from the 175,000-to-200,000 pace of the last three years to approximately 225,000.

What ADP’s January employment growth was not was a great leap forward for the labor market. It was the slowest increase in payrolls since August and well below expectations for 189,000 job additions. Yet, there are several important factors to keep in mind. As ADP President and Chief Executive Officer Carlos Rodriguez noted, January’s 175,000-job addition was in line with the average monthly job creation throughout 2013, meaning last month was fairly typically, if slow. Furthermore, ADP’s National Employment Report is far less authoritative than the Labor Department’s jobs report; ADP’s numbers often miss the official count by 50,000 jobs, and in December difference between the payroll processor’s report and that of the Labor Department was 150,000 jobs. In December — before the government figures were released showing the meager 74,000 payroll additions — the payroll processor had announced strong job creation figures, and in that light, the firm’s recent downward revision makes sense.

Despite the fact that ADP’s January report showed cold weather had again kept the pace of hiring moderate, economists surveyed by Dow Jones are predicting the Labor Department to report U.S. employers added 189,000 jobs last month.

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