Today’s update on initial jobless claims suggests that the recovery is at risk of stalling. Indeed, the April surge in new filings for unemployment benefits warned as much. Although the surge has moderated this month, the data appears stuck in a range that implies weak economic growth at best.
New claims rose last week by 10,000 to a seasonally adjusted 424,000. That’s too high to inspire much confidence that the economic reports in the weeks ahead are poised to impress on the upside. More disturbing is the recent increase in the four-week moving average of new claims. The message here is that the ranks of the newly unemployed have popped higher and that this change for the worse is more than statistical noise.
The numbers haven’t surged to a degree that leaves no possibility for thinking positively. For what it’s worth, the data suggests to your editor that the economy may slow but still manage to avoid a recession. But even that slight bit of optimism is subject to change as new numbers roll in. We’re at a critical juncture—again and small shifts in sentiment and economic trends can unleash big changes.
A cleaner look at what’s at stake is available by reviewing jobless claims on a rolling 12-month percentage-change basis. Because this is a year-over-year comparison, we can ignore the seasonal adjustment and focus on the raw numbers as reported. The benefit of looking at new applications for unemployment benefits in this context is that it strips out any short-term volatility, which tends to be quite high for this series.
The second chart below presents the data in this way and as you can see there’s been a upward trend for about a year. In other words, the fall in jobless claims is lessening. That’s not necessarily surprising. As the post-recession expansion matures, the pace of decline in jobless claims is all but certain to slow relative to the year-earlier figures. But at some point the trend slows too much and reflects an economy that’s at risk of slipping into a new recession. No one’s really sure where that point of no return is, but we’re a lot closer to it now than we were a few months ago, based on the unadjusted annual change in new claims.
The fundamental issue is, of course, jobs. If the 12-month trend in jobless claims continues to inch higher in the weeks ahead, it will cast a dark cloud over the prospects for the labor market, which is at the core of evaluating where the economy’s headed. Indeed, look at the chart above and take note that an early warning of the approaching Great Recession was reflected in the steadily rising 12-month percentage change in new claims. By mid-2008, this series was sending a powerful sign that a new recession was virtually assured by consistently positing year-over-year gains. Fortunately, we’re still a long way from such levels. Indeed, the latest numbers reveal that jobless claims are still falling on an annual basis–by more than 9% as of last week. The question is whether this annual measure will continue to deliver encouragement? The margin of comfort is thinning quickly. It doesn’t help that the trend over the past year doesn’t appear friendly, or that the appetite for risk-free assets is on the march again. The influx of assets into the 10-year Treasury, for example, is such that the yield has fallen to 3.13%, or the lowest since last December.
Perhaps the strongest piece of statistical optimism to counter the recent trend in new jobless claims is the fact that nonfarm payrolls have been improving lately. Indeed, job growth in April was the strongest since the Great Recession ended in June 2009, as per NBER. It’s hard to reconcile last month’s encouraging rise in job creation with the recent numbers in new claims. It’s a divergence that won’t continue for long, however. One metric or the other will give way. Any bets as to which one?
The May employment report is scheduled for release next week (Friday, June 3), and so this much is clear: There won’t be a leg to stand on if the private nonfarm payrolls number disappoints in a big way. In fact, nothing short of a large gain on the order of 250k-plus is likely to bring an antidote to the discouraging jobless claims reports in recent weeks.
“There is no doubt the economy has slowed. We will call the first half of 2011 as a soft patch,” says Robert Dye, a senior economist at PNC Financial Services. But it’s too early to throw in the towel, he adds. “We should see growth accelerate in the second half in the 3.0 percent to 3.5 percent area.”
If so, we’re likely to see some sign of improvement in the jobless claims numbers. For the moment, however, that’s still wishful thinking.