Is The Stalled Decline In Jobless Claims Really Over This Time?

Was that a tipping point for the trend in jobless claims? Today’s update of weekly filings for new unemployment benefits shows a drop to a seasonally adjusted 368,000 for the week through February 26. Initial claims haven’t been this low since May 2008. Today’s number also marks another milestone since the end of the recession: the first back-to-back weekly readings below 400,000.

It still too early to declare victory for the trend in jobless claims, but it’s a bit harder to argue that this metric remains in neutral. Indeed, the more relevant four-week moving average for this series also dipped below 400,000 last week for the first in nearly three years. It’s going to take another few weeks to decide if this is real, but today’s report surely offers the best news for this measure of labor market activity in many months.

Adding to the encouraging profile is the ongoing decline in continuing claims. As the second chart below shows, the number of workers previously collecting jobless benefits dipped again in the latest reading, falling to just over 3.8 million for the week through February 12 (this series lags new claims by one week). That’s the lowest since October 2008.

It all adds up to an encouraging batch of numbers. Of course, there are caveats to consider. First is the obvious one. Initial claims data can and does swing wildly from week to week and so one has to take any given report with a grain of salt. But for the reasons noted above, that’s suddenly becoming less of a hazard, given what appears to be a new leg down.
Second, and more importantly, is the question of whether today’s update on claims will translate into stronger growth in job creation? History suggests it will, although the downturn in new claims tends to precede sharply higher job growth by several months at least. As such, it may be some time before we see better numbers in nonfarm payrolls, which is scheduled for an update tomorrow. Given the various macro challenges haunting the economy, waiting for confirmation on this front isn’t going to be easy.
Another issue is how the new rise in oil prices plays out. It would more than a little frustrating to learn that the latest round of turmoil in the Middle East triggers a new bull market in energy prices that marginalizes if not derails the nascent acceleration in the labor market. It’s not yet clear if we’re looking at that scenario, but the crowd is surely pondering the possibility now that oil’s routinely trading over $100 a barrel.

Even if energy prices remain stable in the months ahead, there may be another joker in the deck: monetary policy. The key reason that the Fed has kept its target rate at just over zero percent is the ongoing weakness in job growth. If the labor market is set to grow at a faster pace than we’ve seen recently, the probability of raising rates goes up. The Fed funds futures market isn’t pricing in big gains for rates any time soon, but that may change if—if—the labor market starts showing more muscle. In that case, the future could be tricky. Raising rates is inevitable, although the margin for error is relatively narrow for timing and magnitude. Hike rates too fast and it could marginalize job growth before it really gets started. Wait too long, and inflation could build up a head of steam—no trivial risk with Fed funds at virtually zero.
Navigating the future is always risky, and that goes double these days. But at least the possibility for positive outcomes is a bit brighter if the labor market’s revival is progressing. It’s still one day at a time, but today’s numbers keep hope alive. Let’s see what tomorrow’s payrolls report brings.