Thursday, January 19, 2012

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

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