Today’s update on weekly jobless claims delivers the best news for the labor market in recent memory. It certainly one of the strongest reports for this series since the Great Recession ended in June 2009. However you describe today’s news for this leading indicator, it’s unequivocally encouraging, and powerfully so. Yes, it may be misleading, as any one data point for this volatile series can be, and so we should be wary until we see more numbers in the weeks ahead. But at the very least today’s update strengthens the case for expecting continued healing in the labor market and slow economic growth, perhaps at a moderately faster pace. Analysts in the recession-is-here-now camp, in other words, have some explaining to do.
New filings for unemployment benefits dropped 30,000 last week to a seasonally adjusted 339,000, the Labor Department reports. That’s the biggest weekly drop in three months, which means that the total claims last week fell to a new post-recession low. In fact, it gets better: last week’s claim tally is the lowest since January 2008.
Filtering out the seasonal adjustments and focusing on year-over-year changes brings an equally powerful message in favor of optimism. As the next chart shows, new claims dropped 19% last week relative to a year ago. That’s nearly twice as big as the annual decreases in recent months, and it’s one more sign for thinking that maybe, just maybe, we have a game-changer on our hands.
It’s worth reminding again that weekly claims data is noisy and so we shouldn’t get too excited about today’s update. Let’s see how the revisions go and how incoming data fares in the weeks ahead. If we see today’s decline hold, we’ll have a much stronger case for thinking that the labor market is poised for modestly stronger growth than we’ve seen recently.
Meantime, we can say with a high degree of confidence that the labor market continues to heal, which is a critical factor for analyzing the business cycle. As I’ve been emphasizing all along, the year-over-year change in unadjusted claims is the metric to watch and it’s been routinely dropping at a roughly a 10% pace, week after week. Ignoring this trend, as some analysts seem to do, has been a big mistake for looking ahead. This has been, and remains, a strong signal for expecting that the labor market isn’t imploding and that jobs growth will roll on for the foreseeable future. It’s also a sign that recession risk remains low.
This relatively upbeat analysis is all the more persuasive when you consider that a broad reading of economic and financial indicators tells us that the economy isn’t in imminent danger of contracting. Again, I’ve been making this point for months. Why? Because the data has been quite clear all along, as shown by The Capital Spectator Economic Trend Index (CS-ETI). Today’s news on weekly claims offers one more reason for thinking that the economy will continue to grow.
Is the sluggish pace for economic growth set to give way to a faster expansion? It’s too soon to tell. But looking at nowcasts of third-quarter gross domestic product suggests that we’ll see an improvement over Q2’s weak 1.3% real annualized increase in real GDP when the Bureau of Economic Analysis releases its report on October 26.
For now, the worst you can say about the economy is that it continues to expand at a slow rate and so it’s vulnerable to any number of risks on the macro landscape, starting with the approaching danger of the fiscal cliff. But suddenly the odds look a bit better for thinking that slow growth might get a bit faster.