Labor Market Stumbles Through the Holidays as Jobless Claims Rise

Unemployment Office

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Initial claims for unemployment insurance increased about as much as expected for the week ended December 14. The Department of Labor reports that seasonally adjusted first-time claims increased by by 10,000, or about 2.7 percent, to 379,000. This follows a 23 percent surge in claims for the week ended December 7, which was ostensibly due to seasonal factors. The four-week moving average, a measure that smooths out some volatility, increased by 13,250 to 330,250.

Labor market data remain under the microscope now that the taper has arrived. The U.S. Federal Reserve announced on Wednesday that it would reduce the flow rate of quantitative easing by $10 billion per month in January and suggested that an accommodative monetary position may be appropriate even after headline unemployment falls below the 6.5 percent previously indicated as a threshold at which a policy change would be considered.

Part of the reason for this edit to forward guidance is that headline unemployment data are a decreasingly accurate proxy for the health of the overall labor market. U-3 unemployment may be the single most useful indicator, but it is incomplete, and alternative measures of labor market health such as initial claims for unemployment insurance can help contextualize the data.

As much as the markets would like to clear away some of the fog of war that surrounds the labor market, the weekly unemployment insurance data are not particularly revealing. The holiday period is packed with seasonal, short-term employment, which December’s relatively elevated new claims rates less threatening than they could be.

What is most worth watching for in labor market data is job growth. Payrolls have expanded at a pace of about 200,000 per month for the past several months, and the growth has been cited as a cause for optimism by many economists including Fed Chair Ben Bernanke. Strong, sustained payroll growth is perhaps the clearest indicator of a healing housing market — more so even than a declining unemployment rate because of how declines in labor force participation can superficially lower the headline number.

The market will still keep an eye on the headline rate, though. Unemployment fell to 7 percent in November, and the Fed projects that it will fall to a range between 6.3 and 6.6 percent in 2014.

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