Jobless Claims Drop Sharply. Can We Believe It This Time?

New jobless claims dropped last week by a hefty 37,000 to a seasonally adjusted 391,000. That’s the biggest weekly tumble since May, pushing new filings for jobless benefits under the 400,000 mark for only the second time in 25 weeks. It looks good, and it surprised a lot of economists. But let’s refrain just yet from declaring this as the start of something big.

Indeed, new claims dipped under 400,000 several times in the early months of this year, but it didn’t mean much, at least not by the only standard that matters at this point: job growth. The growth in private nonfarm payrolls has weakened considerably since the spring, with August’s report indicating virtually no change. Does today’s surprisingly strong dip in claims foretell of better days ahead for the labor market? Perhaps, but you’ll excuse me if I remain a wee bit skeptical until further notice. The dip under 400,000 earlier this year looked like the real deal for a time, and it was based on more than one data point. But stuff happened and so the revival turned out to be an imposter. Perhaps the second time’s the charm, but it’ll take much more than one (so far) brief flirtation under 400k.
For the moment, though, the change of pace is refreshing. Even the four-week moving average managed a small retreat—the first in six weeks.

The trend also looks stronger on a rolling 12-month basis. Unadjusted claims are roughly 13% lower vs. the year-earlier period, a substantial change for the better compared with the readings in recent weeks.

The bad news is that claims are still elevated. The good news is that the trend is still encouraging, which is to say that weekly claims continue to fall on an annual basis. But they’re not falling fast enough to inspire high confidence that job growth will be strong. Instead, jobless claims are signaling that the economy will struggle but avoid another recession.
If there’s a case for upgrading this outlook to a stronger dose of optimism it’ll take more than one good week in claims data. “Apart from what might be an anomaly, the underlying trend in the labor force is still disappointing,” notes Sean Incremona, a senior economist at 4Cast Inc. “There is a lot of economic uncertainty weighing on the broader economy.”
Maybe it’s reasonable to say that there’s a bit less uncertainty today, at least on the margins, a theme that also finds support in this morning’s third estimate of second-quarter GDP. The U.S. economy grew at a real 1.3% annualized pace during April through June of this year, up from the previous 1.0% estimate.
A small upward revision for the state of the economy several months ago is better than a kick in the head, but it doesn’t change the facts on the ground in the here and now. “We’ve had close to 10% unemployment now for a number of years, and of the people who are unemployed, about 45% have been unemployed for six months or more,” Fed chairman Ben Bernanke said yesterday. “This is unheard of” and it represents a “national crisis.”
Can today’s drop in jobless claims inspire a brighter outlook for Q3 GDP? Maybe, but it’s going to take some corroborating numbers in the weeks ahead. Meantime, cautious optimism is the new new thing this morning. “It’s encouraging to see jobless claims come in below a 400 handle,” advises Omer Esimer, chief market analyst at Commonwealth Foreign Exchange, via Reuters. “And even the GDP number, which at this point is dated, is adding to the overall improved tone in markets,” he adds. “But the overall landscape hasn’t changed much, so it probably doesn’t warrant all the optimism we’re seeing. I’m still somewhat bearish on the outlook for growth.”