Do Initial Claims Matter?

Fox Business details:

New applications for unemployment benefits dropped to a near four-year low last week, a government report on Thursday showed, pointing to continued improvement in the labor market.

The Labor Department said initial claims for state unemployment benefits dropped 50,000 to 352,000, the lowest level since April 2008 and the biggest drop since September 2005. The prior claims data was revised up to 402,000 from the previously reported 399,000.

Good news, no doubt. BUT, initial claims SHOULD be falling (and falling dramatically). According to the BLS, we still employ less than 5 million people from the peak employment achieved in late 2007. Initial claims simply tell you the number of new people filing for unemployment benefits (i.e. those just laid off). If you have already shed 5 million people, this number SHOULD be falling (there are less people to lay off) even without an improved underlying economy.

The following chart in no way is intended to be a good measure of normalized initial claims, but it is meant to make that point. It shows the initial claims figures (through December) as an absolute figure and relative to the number of new jobs made over the previous 95 months (an arbitrary number that is the length of time from the bottom in employment during the '01 - '02 recession and the latest recession) and shows that the reduction in initial claims is less apparent when you take in account the sluggish employment growth.

So do initial claims matter? You sure don't want to see them rising. But. there is only a limited amount of information in the data when an economy has experienced the type of employment recession the US has faced the previous 4 years.

Source: DOL / BLS

Initial Claims No Longer Falling

Bloomberg details:

More Americans unexpectedly filed claims for jobless benefits last week, indicating companies are trying to cut costs further even as the economy stabilizes.

Applications rose to 576,000 in the week ended Aug. 15 from a revised 561,000 the week before, the Labor Department said today in Washington. The number of people collecting unemployment benefits the week earlier was little changed at 6.24 million.

Companies may keep paring staff in coming months, albeit at a slower pace, and hiring linked to the government’s recovery effort may not gain speed until 2010. While the unemployment rate dipped last month, economists project it will reach 10 percent by early next year, restraining consumer spending.

“We still have a long way to go,” James O’Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut, said before the report. “We need the labor market to pick up for consumer spending to continue to improve.”

The fact that this figure is not falling is worrisome. My guess (not verified) is that most companies have already laid off the "low hanging fruit", thus this likely reflects laying off individuals that companies were attempting to hang on to (OR businesses failing altogether).

Source: DOL

Net Claims is What Matters

Ahead of today's unemployment report...

Ed, from Credit Writedowns, had a post last week which sparked a back and forth between the two of us about a decline in initial claims marking the end of the recession. I wasn't / still am not so sure this time around. Ed stated:

So, jobless claims are definitely a number to watch as we head into the spring and summer. Absent claims numbers averaging 700,000 by mid-to-late summer, it will be safe to say, we are on the road to recovery. What kind of a recovery we get is another entirely different question.

A summary of my response is as follows:

I understand that a bottom in the 4-week moving average for initial claims (i.e. firings) has historically been a leading indicator for an economic bottom, but that needs to correspond with the hiring of those that had previously been laid off in areas of the economy that are rebounding. In other words, the total number of unemployed people is what is relevant and while that has historically correlated with initial claims, it has diverged this go around.

Those individuals already unemployed, have remained unemployed FAR longer this cycle than past cycles, hence the reason why continuing claims continues to grow, even while initial claims reverses course. Thus, even with a decrease in initial claims, continuing claims will continue to rise (if the number of people laid off is greater than the number of people rehired into the workforce, the overall unemployment rate will continue to rise as well).

An example... if the number of people laid off drops from 600,000 to 500,000 (a SUBSTANTIAL drop), the unemployment rate can still grow if either of the following two things happen (all else equal):

1. The workforce grows (we need to hire people just to keep the unemployment rate level)
2. The number of people rehired + those that fall out of the workforce is less than the number fired (i.e. 500,000)

Why?

Initial claims are ONLY new jobless claims filed by individuals seeking to receive state jobless benefits, thus only those people that have been fired.

Continuing claims take into account those people that have already been fired for at least a week and continue to receive state jobless benefits.

Thus, if firms are firing less, but hiring by a smaller amount than that... continuing claims rise even though initial claims fall.

Here are charts of this exact phenomenon. It shows the one-year and 4-week changes in the number of those fired (i.e. the initial claims) less than number of people that have been hired (or fallen out of the workforce). To do this I took the previous week’s initial claims and removed the change in the continuing claims.

Rolling 12-Month

Rolling 4-Week

To conclude… even though initial claims is slowing / declining, the above figure keeps rising (to be a drag all it needs to do is stay above zero). In most recessions, firms that are strong will begin to hire more people when they sense a rebound than are fired by struggling companies, thus when initial claims flatten it has marked a bottom. I personally question whether this will happen this time. From what I’ve heard in the job market, many firms still have a hiring freeze through the year and/or are still shedding capacity.

Don't Mess with Texas: Continued Claims Edition

Initial Claims - June 28th