Jobless Claims Make Steady Progress, But Nothing More

Source: Thinkstock

Source: Thinkstock

What is clear is that initial claims for unemployment benefits — which serve as a proxy for layoffs — paint a picture of a strengthening and resilient labor market. If initial claims for unemployment benefits defined the whole labor market story than the narrative of the jobs recovery would be easy to summarize; progress is steady, or at least, the labor market situation is not worsening. The Department of Labor reported Thursday that initial applications for jobless claims declined by 10,000 to a seasonally adjusted 311,000 in the week ended March 22.

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This pace of new jobless claims surpassed analysts expectations for 325,000 new applications and, more importantly, last week’s drop not only put claims at levels last seen more than four months ago, before cold weather put the breaks on the labor market. Jobless claims are now in line with pre-recession levels; before the recession began in December 2007, an average number of 320,000 initial claims were filed each week due to the normal churn in the job market. Plus, economists say any claims figure below 350,000 indicate moderate job creation.

Confirming the thesis of labor market resilience is the fact that the underlying trends in jobless claims remained positive as well in the past week. 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 employment, which are far more telling of labor market health than weekly readings. Falling by 9,500 from the previous week’s upwardly revised 327,250, the four-week moving average for the week ended March 22 dipped to 317,750.

In addition, the number of people continuing to receive jobless benefits fell to 2,823,000 million in the week ended March 15, a 53,000-claim decrease from the 2.89 million continuing claims filed in the previous period.

But while the downtick in jobless claims can be termed as a positive sign for the labor market, it is important to remember that jobless claims numbers are a leading economic indicator, and therefore only offer indirect clues about the pace of hiring — the other piece of the labor market story. While “inroads” into unemployment are being made, progress is still slow. In other words, job growth may no longer be bad, but it is still sluggish.

February’s job growth of 175,000 is approximately just enough to keep pace with population growth, and job growth has yet to return to the average of 200,000 jobs per month added from June through November of last year. Further, economists say that 200,000 jobs per month must be added in order to attain sustainable job growth. Factoring in population growth, economists have calculated it will still take years for the job market to return to pre-recession health when the unemployment rate was between 4 percent and 5 percent.

Still, “the labor market continues to improve,” said Brian Jones, senior U.S. economist at Société Générale in New York, who accurately forecast the number of claims. “We’re likely to get eye-popping numbers for March payrolls. The economy is not in a soft patch.” Employers — who have generally been cutting back on layoffs as the jobless claims numbers confirm — will be encouraged to hire more workers once consumer demand picks up. But, it is important to remember that because consumer spending is intimately connected to the health of the labor market, consumers also needed greater employment gains to feel confident enough to increase their outlays.

March’s Employment Situation Report will be released next Friday, and analysts expect the economy to have created 190,000 jobs this month.

Maximum employment is one of the dual mandates of the Federal Reserve — the other being stable prices. With a nod to that first task, in December of 2012, the central bank made an unemployment rate of 6.5 percent one of its thresholds for hiking the benchmark interest rate, or federal funds rate, which has remained near zero since late 2008. But Fed officials now believe the headline unemployment rate is too limited an indicator of the health of the labor market; the rate of joblessness has fallen to 6.7 percent in recent months, meaning it is extremely close to the Fed’s targeted rate.

Yet, Chair Janet Yellen thinks the economy is still far too weak to increase rates. Declines have come in a large part because because many out-of-work Americans have become discouraged and stopped looking for work, which means they are no longer part of the labor force and no longer counted as unemployed. That reality pushed the Fed to find new language to define the forward guidance on interest rates.

The harsh weather experienced by much of the United States in January and Februar caused U.S. manufacturing output to record its biggest decrease in more than 4-1/2 years in January; kept job creation weak in December and January; contributed to a slowing in consumer spending over the past two months; and impacted residential construction, with January housing starts dropping to the lowest levels experienced in almost three years. But as Yellan noted in a press release after last week’s Free Open Market Committee meeting, weather has taken much, though not all, of the blame for the recent slowdown. “It’s an important factor. It’s not the only factor,” she said, meaning there are other factors at work in the country’s employment situation.

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