Breaking Down September's Jobs Numbers

The new filings for jobless benefits are still very high, but both new claims and continuing claims are trending downward. James Picerno from The Capital Spectator breaks down the latest numbers and why the downward trend is not necessarily an indicator of recovery. See the following post for more.

This morning's update on initial jobless claims offers more encouragement for thinking that the economic contraction has bottomed out. That's still distinct from proclaiming the arrival of a recovery worthy of the name, as we've been discussing for months, including here and here. Nonetheless, the downward trend in initial jobless claims—a valuable leading indicator of the business cycle, as we explained back in March—continues to signal that the recession on a broad macro scale is over or nearly over.

Granted, last week's decline in new filings for jobless benefits to 550,000—the second-lowest so far this year—may be skewed because of this past weekend's Labor Day holiday. As always, we'll have to wait for more number crunching by our trusty servants in Washington. Meantime, the chart below doesn't give us any reason to think that initial claims aren't biased toward lower levels in the future, albeit erratically and slowly, but downward nonetheless.



Another encouraging trend in today's unemployment numbers arrives by comparing initial claims with so-called continuing claims, by far the higher number of the two. Indexing this pair to measure the trends on an apples-to-apples basis suggests that we're finally seeing some progress in reducing continuing claims, as our second chart below shows.



Continuing claims reflect the ranks of the unemployed who've previously been collecting jobless benefits. A decline in this series suggests—emphasis on "suggests"—that people who've been on the unemployment rolls are finding work. Generally speaking, a decline in initial jobless claims is all the more persuasive if continuing claims are falling too. As the second chart directly above suggests, there now appears to be greater downward momentum in both series, which is encouraging, at least on its face.

We qualify the last point because it's not yet clear if the decline in continuing claims is a quirk. One possibility is that continuing claims is falling for less than bullish reasons. For example, the shrinking number of continuing claims may reflect that the jobless are falling off the government's radar because their unemployment benefits have expired.

In short, the data looks mildly encouraging as reported but we're still a long way from declaring the Great Recession over as it relates to Main Street. (Wall Street's perspective is another story.) But this much is clear: a recovery of some degree in the labor market is critical in order to repair the damage of the past year or so. Today's numbers tell us there's still a lot of pain, but at the very least today's report suggests that the trend isn't getting any worse and maybe, just maybe, it's getting marginally better.

This post has been republished from James Picerno's blog, The Capital Spectator.

Data Shows Reasons To Be Optimistic on Economy

Are the subtle signs of an improving economy, such as decreasing jobless claims, enough to warrant optimism? Or should investors be cautious until we see employers actually increase hiring and the unemployment rate decrease? According to The Capital Spectator, we should be both cautious AND optimistic.

In early March we asked: When Will It End? At the time, we argued that watching the weekly squiggles of new filings for jobless benefits was a productive effort for estimating when the cycle would turn.

The reasoning is that a careful study of history shows that initial jobless claims have a habit of peaking concurrently or just ahead of the technical end of the recession, as defined by the National Bureau of Economic Research. Waiting for NBER to proclaim the downturn's denouement isn't practical, since the organization takes its sweet time on such matters. Watching initial jobless claims, then, may be a more timely reading of what comes next for the business cycle. It shouldn't be analyzed in a vacuum, but as part of a broader review of leading economic indicators it's a valuable tool for discounting the future.

Today's jobs report, along with yesterday's update on jobless claims, offer another round of data releases for thinking that our counsel in March is still valid. Although the economy shed lots of jobs again last month, the decline was relatively mild compared to the magnitude of losses in the recent past. Nonfarm payroll employment fell by 345,000 in May, or roughly half the average monthly decline for the prior 6 months, the Labor Department reports.

Meanwhile, yesterday's update on initial jobless claims shows that new filings fell again last week, dropping to 621,000. That's still high and on its face the one number implies the recession rolls on. On the other hand, the trend of late offers some encouraging clues. As our chart below illustrates, last week's claims are still well below the peak of 674,000 that was set back in the final week of March. By virtue of its general decline over the past two months, modest though it is, the jobless claims indicator continues to predict that the recession has ended. We can't be sure, of course, at least not yet. But for the moment, there's mounting reason for hope, which is bolstered by today's jobs report.



Of course, the technical end of recession, especially one as painful as the current one, isn't easily forgotten. Indeed, while the leading indicators point to recovery, the lagging indicators, as expected, continue to get worse. Unemployment, for instance, rose last month to 9.4% from 8.9% in April. More of the same is probably coming.

In terms of people's lives, the official end of the recession is likely to have little meaning for many months or even quarters. The signal that Joe Sixpack is looking for—the creation of new jobs—is still probably a ways off. Nonetheless, a thousand-mile journey must begin with the first step, and so an economic recovery necessarily begins quietly, starting with the end of the recession.

We're not completely confident that the contraction has ended. Indeed, the fall in jobless claims, although obvious so far, isn't fully convincing. A dip below the 600,000 mark, however, would help tip the scale in favor of optimism. Nonetheless, the trend so far can't be denied, at least not today. Anything's possible when it comes to the slippery business of projecting economic trends in the short term, but the odds that it's over are rising, or so the numbers suggest.

Keep in mind that jobless claims are but one of several forward-looking indicators predicting revival. In the June issue of The Beta Investment Report, we report that our proprietary index of leading indicators continues flashing a strong signal that recovery is near, or at least that the downturn's momentum is lessening.

Even if the recession is over, and one day it will be, there remains the bigger question: What magnitude of rebound awaits? On that point we remain quite wary. One reason is that if a rebound is underway, the shift implies a new set of challenges lurking in the future, starting with the issue of debt, interest rates and inflation, all of which threaten in the medium- to long-term outlook.

But for now, let's savor the moment. There are a few extra data points that offer reason for mild optimism. Monday, of course, is another day.

This post can also be viewed on capitalspectator.com.