Today’s update on initial jobless claims doesn’t look good, but it isn’t a death blow either. In “normal” times, one might dismiss the latest numbers as noise. But in the current climate, with the potential for a deepening of the euro crisis, it’s hard to overlook even small bits of deterioration in economic news.

The main issue is that claims are creeping higher (again). The drift so far falls well short of convincing evidence that the cycle has turned. Indeed, it’s not yet obvious that the latest numbers reflect anything more than the usual volatility. But with worries about what happens next on the Continent, it’s hard to put a positive spin on today’s data. New filings for unemployment benefits rose last week by 6,000 to a seasonally adjusted 386,000. The increase itself isn’t the problem so much as the appearance of a bottoming out in the downward trend over the past year.

Caution is always required when interpreting weekly numbers for this volatile series, which inspires looking at unadjusted year-over-year percentage changes for a more reliable profile of the trend. Unfortunately, this measure is looking weaker in the wake of the latest numbers. As the second chart below shows, the annual decline in new claims was a modest 6.8% through last week—the slowest rate of retreat since April.

Does this all add up to a nail in the coffin for the labor market in the weeks and months ahead? No, not yet. These numbers bounce around a lot in the short term and so it’s premature to say that the cyclical jig is up for this series. However, if the year-over-year decline rate continues to move closer to zero in the weeks ahead, it’s going to be a lot tougher to refrain from adopting a darker view for job growth and the economy generally.
“This is a bit of a notch-shift higher with jobless claims,” says Bricklin Dwyer, a BNP Paribas economist. “We’ve seen some disappointing employment reports in May. The labor market is just kind of mediocre right now, not gaining much traction.”
If a more ominous outlook is warranted, we’ll soon see more convincing signs in the weekly claims numbers, and in other data too. On that note, the latest full month of economic data (April) shows minimal sign of recession risk. In particular, 13 economic and financial indicators on a rolling 12-month-change basis that I’m tracking/analyzing for a new study on the business cycle show no sign that the economy’s on the cusp of a new downturn (I’ll have more to say on this study soon). In particular, virtually all the indicators are comfortably in positive territory through April vs. a year earlier.
What’s more, the May numbers that have been released so far continue to give growth the benefit of the doubt. Will tomorrow’s update on industrial production for May tell a different story? Yes, according to the consensus forecast via Briefing.com, which expects a dramatic slowdown in industrial production: a slight 0.2% rise for May vs. April’s 1.1% increase.
We are, it seems, at a critical juncture once more. The available data published to date suggests that the economy a) wasn’t in recession in April and b) there’s encouraging odds for thinking that May won’t succumb when the final reports are updated. But even May data may be irrelevant at this point. In a world that’s holding its breath over the potential fallout from a deepening euro crisis, it’s only natural to wonder if the economy’s modest momentum in the past two months will last through the summer. Meantime, if there was any hope that Germany–Europe’s strongest economy and the last, best hope for macro salvation on euro-related matters–would up its game at building a hire fire wall, Chancellor Angela Merkel managed those expectations down earlier today in a rather big way:

In a speech to lawmakers ahead of the meeting of G20 leaders in Los Cabos, Mexico on June 18-19, Merkel warned Europe could not take the easy way out with solutions based on “mediocrity” that failed to address core problems.
“All those looking to Germany again in these days in Los Cabos, who are expecting a drumroll and the answer… I say to them Germany is strong, Germany is an engine of economic growth and a stability anchor in Europe,” Merkel said.
“But Germany’s powers are not unlimited,” she said, cautioning against counting too much on Germany as the sole crisis fighter in Europe.
“All the (aid) packages will ring hollow if you overestimate Germany’s strength,” she said.