A Closer Look At The Drop In Jobless Claims

Yesterday’s news that new jobless claims dropped sharply—to under 400,000 for the first time in three months—raises the question of whether the good news will continue? “That’s partly up to Congress,” opines Mark Thoma, professor of economics at the University of Oregon. “If they keep bickering until the time to raise the ceiling passes, or if the deal they agree to imposes substantial cuts to spending too soon, that could put an end to any good news on the recovery for awhile.”

Anthony Chan, chief economist at JPMorgan Private Wealth Management, is cautiously optimistic, albeit with the emphasis on the adverb. He explains:

I would view this number as encouraging — not as encouraging as the headline would suggest, but certainly encouraging. If the four-week moving average moves below 400,000, that would confirm we’re making definitive progress. Right now the best conclusion is this suggests the progress is tentative. I would not jump on the bandwagon suggesting labor market problems are completely healed because there are severe seasonal adjustment problems.

James O’Sullivan, global chief economist at MF Global, isn’t jumping on bandwagons, but he emphasizes what is arguably the obvious point. “The figures are encouraging, though we need to see a sustained decline in claims,” he tells Bloomberg. “The direction in claims invariably sends the right signal for growth in employment.”
Yes, but it’s important to read the fine print on yesterday’s numbers. Asha Bangalore at Northern Trust reminds that “it is important to recognize that the spikes of initial jobless claims in April and May were related to the natural disaster in Japan that disrupted supply of auto parts and led to layoffs.” Accordingly,

A resumption of the supply of auto parts has led to hiring again and smaller layoffs in the auto industry. The low for initial jobless claims prior to the earthquake and tsunami in Japan was 375,000 during the week ended February 26. By implication, we will need to see readings below this mark to declare with strong conviction that robust hiring has resumed.

Westpac Banking Corp. agrees:

US initial jobless claims fell 24k to 398k last week – the first sub 400k reading since early April, though we caution that annual auto plant shutdowns for new model retooling usually cause week to week claims volatility in July – and it’s a bigger risk this year given that many plants shut early due to Japanese parts supply issues.