Where Is the Labor Market Recovery Heading in 2014?

After a volatile December, initial applications for unemployment benefits dropped to the lowest level recorded since November. As the Department of Labor reported on Thursday morning, jobless claims decreased 15,000 to 330,000 in the week ended January 4, which is considered the fifth and final week of December.

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Early in December, initial claims for unemployment benefits ticked upward. After months as one of the only sources of strength in labor market, that uptick appeared to be cause for concern. Excluding the effects that Washington’s political drama had on jobless claims in the month of October, the number of Americans applying for unemployment benefits has been trending down for much of the year.

And even though initial claims data — which serves as a proxy for layoffs — does not tell the whole labor story, that strength was encouraging. Yet after jumping 69,000 claims to 369,000 in the week of December 7 and rising 11,000 to 380,000 in the week of December 14, initial applications began falling once again.

After increasing in the previous week, the four-week moving average fell in the week ended January 4. 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. Mesirow Financial’s chief economist, Diane Swonk, told CNBC it is “the trend in employment that matters, and the trends have been good.”

As she put it, the initial claims numbers are not as important as the revisions. “In an economy you tend to miss stuff over time. You miss turning points,” she said to CNBC. “These numbers aren’t very good at picking up turning points. They only catch it in the revisions.” Last week, that average decreased by 9,750 claims to 349,000 from the previous week’s upwardly revised average of 358,750.

As a leading indicator, jobless claims tell economists where the labor market recovery is headed. Yet declining first-time applications for unemployment benefits and falling layoff numbers must be accompanied by increased hiring. It is true that initial claims typically wane before job growth can accelerate, but for most of last 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. As a lagging indicator, the Department of Labor’s monthly Employment Situation Report gives economists a snapshot of the employment gains made over the past four- to five-week period. Economists generally concurred that the leading trends for the labor market were favorable heading into 2014.

“The labor market is continuing to strengthen as we go into 2014,” UBS Securities economist Kevin Cummins told Bloomberg ahead of the jobless claims report. However, there is some disagreement over how strong employment gains were in the last month of 2013.

A more complete picture of the December’s job growth will be available once the Department Labor’s Employment Situation Report is released on Friday. Economists anticipate December’s Employment Situation report to show employers added between 191,000 and 196,000 new positions to their payrolls last month, while the unemployment rate is expected to remain unchanged at 7 percent.

Payroll processor ADP’s less-authoritative national employment report, released Wednesday, was met with mixed response from economists. “The ADP report signaled what might be an above-consensus release coming out Friday,” Janney Montgomery chief market strategist Mark Luschini told CNBC. Comparatively, Bank of Tokyo-Mitsubishi chief financial economist Chris Rupkey believes the report may have set expectations too high. “Unfortunately, ADP may have done us a disservice by winding everyone up,” he told the news outlet.

U.S. employers added 238,000 new positions to payrolls last month, making December both the fifth month of solid job creation and the strongest month of employment gains in 2013, according to the employment report prepared by payroll processor ADP.

The U.S. economy added an average of 204,000 jobs from August through November, an increase from the 159,000 per month added between April and July. From January through November, employers added an average 188,550 jobs per month last year, a slight increase from 2012’s 182,750 monthly job additions.

It seems as if the recovery of the labor market is gaining momentum, which bodes well for the economy. Job growth and consumer spending have a close relationship: Businesses do not want to spend money unless they are sure consumers will spending money on the goods and services they produce.

But as long as consumers are worried about their job prospects, they are more inclined to save more and spend less. Therefore, faster job growth combined with greater increases in wages will spur stronger consumer spending, and a healthier American consumer means a healthier U.S. economy. Consumer spending accounts for approximately 70 percent of the country’s gross domestic product.

A stronger trend in job creation is beginning to take shape when monthly job reports are analyzed. 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 21, the total number of people claiming benefits in all programs was was 4,193,749, a decrease of 265,067 from the previous week.

There were 5,356,419 people claiming benefits in all programs in the comparable week in 2012. However, the number of people continuing to receive jobless benefits climbed by 50,000 to 2.87 million in the week ended December 28.

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, although a measure to extend emergency payments for the more than 1 million long-term unemployed Americans for a period of three months passed a key Senate procedural hurdle on January 6.

With the end of the extension of long-term unemployment insurance, only approximately 25 percent of jobless Americans will be collecting unemployment insurance payments, down from 38 percent, according to a report released by Democratic Rep. Sander Levin of the House Ways and Means Committee.

The share of unemployed Americans receiving state or federal aid has never fallen below 30 percent since the government first began collecting the data in 1946, according to that report.

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