Mixed Message? Jobless Claims & Durable Goods Orders Rise

Initial jobless claims increased last week, but so did new orders for durable goods in December. It’s a mixed bag of news, but a closer look suggests that the economy’s capacity for growth continues to bubble.

Let’s start with jobless claims. Last week’s sizable 21,000 increase to a seasonally adjusted 377,000 is disappointing, but it’s not all that surprising. After the previous week’s dramatic fall to depths unseen in nearly four years, some backing and filling is normal. New filings for jobless benefits is a valuable leading indicator, but it’s quite volatile in the short term and so the longer-run trend is a far-superior measure for this series. By that standard, the decline in new claims appears to be intact, as the chart below shows. For the moment, last week’s rise appears to be nothing more than the usual ebb and flow in a generally falling trend.

“The underlying trend is moderately low layoffs,” says Scott Brown, chief economist at Raymond James & Associates. “We certainly have seen a lot of volatility in the week-to-week numbers.”
Quite true, although the year-over-year percentage changes in raw claims numbers continue to post sizable declines. The second chart below puts to rest the idea that the recent fall in jobless claims is due to some seasonal glitch. Instead, the numbers tell us that the trend is still our friend. Indeed, new claims last week were nearly 15% below the levels from a year ago on an unadjusted basis. What’s more, that pace of annual decline has been fairly consistent for months. Maybe the weeks ahead will reverse this virtuous cycle, but the numbers available at the moment still speak clearly: new claims are falling generally, which suggests that the labor market will continue to heal.

Today’s update on new orders for durable goods, another leading indicator, also looks encouraging. Last month’s healthy 3% rise for this series builds on November’s 4.3% gain. Even better, the rolling 12-month pace for new durable goods orders accelerated in December to 17%–its fastest annual rate of increase in more than a year.

The gain in durable goods orders was broad based last month as well. Indeed, the gains remain comfortably in positive territory even after excluding aircraft and defense orders, which can be misleading at times in the search for the broad trend. Meanwhile, the proxy for business investment—new orders for capital goods less defense and aircraft—rose 2.9% in December.
“Improving economic momentum and diminished angst surrounding the financial crisis has encouraged businesses to take on more risk,” advises Richard DeKaser, deputy chief economist at Parthenon Group. “The factory sector will continue to perform well.”
Sung Won Sohn, an economics professor at California State University, Channel Islands, agrees: “There is more horsepower to this economy than most believe,” he opines. “The stars are aligned right for a meaningful economic recovery.”
Perhaps, although there’s still plenty to worry about. The weak economies in Europe are one large risk factor. Another is the weak trend in personal income and spending. As such, the stakes are high for next week’s scheduled update (Monday, Jan. 30) for December’s spending and income numbers. But one forecast service suggests that we may dodge a bullet in the next round of releases on this front. Briefing.com predicts that December’s spending and income numbers will look a bit better relative to November. Nothing less is needed to keep the momentum going.
Ultimately, the decisive factor will be job growth. Late next week (Friday, Feb. 3) we’ll learn how nonfarm payrolls fared in January. Many economists remain confident that we’ll see another decent report on par with December’s relatively upbeat news. The drop in jobless claims over the past several months suggests that’s probably a reasonable forecast.