Jobless Claims Increased Slightly Last Week, But The Trend Remains Encouraging

Today’s weekly update on jobless claims is a good example of how the inherent noise in this data series can mislead us if we’re overly focused on the most recent data points. New filings for jobless benefits rose 4,000 last week to a seasonally adjusted 371,000, pushing claims up to the highest level in a month. The rise is a modest surprise relative to expectations, which projected a slight decline, although the previous week’s total was revised down and so the net effect is close to neutral. In any case, today’s numbers look a bit discouraging, but a deeper review paints a substantially brighter picture.

First, let’s start with the weekly seasonally adjusted figures, which receive most of the attention. As the chart below shows, new claims have been stuck in neutral recently. By some accounts, that’s all you need to know. But if we’re looking at this series for a robust read in the context of analyzing the business cycle, we’ll have to dig a bit deeper.

In particular, let’s review the year-over-year percentage change for the raw claims numbers—before any seasonal adjustment. By this measure, last week’s report delivered good news: claims dropped more than 14% for the week through January 5 compared with the year-earlier figure. That’s the biggest rate of annual decline since last October. By itself it could be more noise, of course. But as the second chart reminds, annual declines of 5%-to-10% have been the general rule for the past year. The bottom line: new claims continue to trend lower, even if it’s not obvious in the latest report.

This is no trivial point. When you review changes in jobless claims on a year-over-year basis across the decades it’s clear that declines by this measure are strongly correlated with broad economic growth. One indicator alone is always suspect, of course, which is why it’s essential to monitor a broad array of economic and financial indicators. For some perspective on that front, here’s my recent update on the US economy’s profile, which continues to look encouraging as of January 8.
The trend in jobless claims doesn’t disagree. Does that mean there’s nothing to worry about? Hardly. Jobs growth is positive, and several indicators for the labor market are moving in the right direction, as are a number of other metrics for the economy. But jobs growth is modest by historical standards and there’s no shortage of hazards that could create trouble tomorrow, next week, and beyond.
At the top of the list of potential troubles: politics, namely: the debate over the debt ceiling. In what by now has become a familiar and disturbing story, our representatives in Washington are again moving perilously close to derailing the economy’s modest growth trend of late with nonsensical arguing over short-term fiscal issues. Looking solely at the numbers suggests the recovery rolls on. The main question for the moment is whether the Beltway crowd will engineer an alternative reality.