The drop of 10,000 in new jobless claims last week to a seasonally adjusted 390,000 provides a bit of a shock absorber for sentiment in the wake of the new wave of euro turmoil via Italy. Yes, even last week’s numbers may be out of date as the Continent’s woes worsen. But for the moment, at least, we know that the labor market was continuing to heal on the margins, as suggested by other metrics, such as the Monster Employment Index or the payrolls report for October. The progress has been slow, but at least there’s been some progress. The optimistic view with the number du jour is that the tepid installment of the latest virtuous cycle is spilling over into November. The big mystery is whether the tenuous revival will survive the new bout of euro darkness? Questions, questions, always fresh questions.

Mysteries aside, last week’s jobless claims tally is another installment on the new new downward trend of the last two months–and the best yet! Weekly filings for unemployment benefits touched the lowest levels since early April. There’s a bit of symbolic significance in retesting the previous lows, and perhaps some economic import as well. April, you may recall, was the month when the previous round of encouraging economic momentum came apart. In terms of initial jobless claims, we’ve come full circle. Normally, that would be a bullish sign worthy of celebration. But with the Italian version of the euro crisis kicking up, I’m keeping my options for expectations open.

“Today’s report is a positive sign for the state of the labor market in the fourth quarter,” says John Herrmann, a bond strategist at State Street Global Markets, via Bloomberg today. “The economy remains very exposed to potential turbulence in the euro zone, but at least the economy is growing at a decent clip. Job retention is pretty high. Businesses have been very carefully managing their headcount.”
I still think the U.S. economy will avoid a recession, or at least has the capacity to dodge a macro bullet. But the edge for growth may be tested in the weeks ahead… again. Just when you thought there was some positive momentum it turns out that there’s another demon jumping out of macro’s shadows and shouting boo. The acid test is watching how the economic numbers hold up (or don’t) in the days and weeks ahead.
The next data point is tomorrow’s Reuter’s/University of Michigan’s consumer sentiment index. The consensus forecast anticipates a slight rise, according to Briefing.com.
More substantial updates arrive next week with the retail sales report (Nov 15) and industrial production (Nov 16), for instance. Even if they deliver encouraging results, those updates still reflect October’s activity and so it’s going to take time to assess how much has changed (or not) in the wake of the news on Italy. Perhaps the crowd will take it all in stride, as this morning’s sharp rebound in U.S. equity prices implies. But a lot can change in a week (or a day). There’s simply too much uncertainty hanging over Europe to assume that we’re finally on a sustained, if modest road to economic recovery. Indeed, that rosy notion was suspect before the Italian troubles went ballistic. Expecting it to fade away by next Tuesday is simply asking too much. The euro crisis may wax and wane, but it’s going to be with us for some time, along with all the other familiar macro baggage.
The possibility, perhaps the likelihood of a “a deep and prolonged recession” in Europe looms. The U.S. economy is arguably in somewhat better shape to withstand any blowback compared with conditions in, say, August. Nonetheless, that’s a thin reed for confidence, assuming it even holds up.
“We have positive momentum to carry us through to the early part of next year, but the headwinds are still going to cap the pace of growth,” says Scott Brown, chief economist at Raymond James. The fear is that today’s cap becomes tomorrow’s weight that drags us down. Figuring out if fear is fate will take another month or so of new numbers.
Meantime, expect plenty of volatility in sentiment and prices. Overall, same old same old, but with a somewhat darker tone.