Good News on the Jobs Front
The latest numbers on weekly unemployment insurance claims gave a boost to those looking for validation of the growing economy. The advance reading of initial unemployment claims was 255,000, a drop of 26,000 from the previous week. That's the lowest level of weekly initial unemployment claims since November of 1973, well over 41 years. Analysts had been expecting numbers closer to 278,000.
Without seasonal adjustment, the numbers look even better — 262,981 during the week ending July 18th compared to 344,363 for the previous week. That represents a drop of over 81,000 claims, or over 23%.
Is this reason to break out the Champagne, or just a temporary bit of good news? Probably it’s a bit of both, but we lean toward the latter.
Deeper Into the Numbers
Since reaching a peak of 665,000 initial claims for the week of March 28, 2009, initial jobless claims have been on a general downward trend. The drop-off was sharp until early 2010, and since then it has remained remarkably steady — arguably a straight-line slope. Should that rate continue, initial jobless claims should drop below 200,000 by late 2017 or early 2018 — something we haven't seen since 1969.
Economists prefer to look at the 4-week moving average to see the broader picture. The 4-week moving average gives a better picture of the unemployment claims trends by smoothing out the weekly volatility, and these low numbers perfectly cancelled out a previous upward spike.
The 255,000 reading dropped the 4-week moving average down to 278,000. Aside from a brief dip into the 266,000 range one month ago and again in 2000, 278,000 is the lowest reading since 1973 — just as with the weekly numbers. The 4-week average also has a similar straight-line slope of decreasing initial jobless claims, so while 255,000 may be a bit of an aberration, it fits in with the statistical trend.
Reactions throughout the markets were fairly predictable. The dollar and Treasury yields both rose after the release of the claims report. Equities were broadly lower, but that likely has more to do with a poor start to the earnings season and recent economic turmoil in China.
Many economists view the unemployment claims drop as a continuation of the recent trend, while noting that July is infamous for volatility in jobless claims. Everything from mid-year shutdowns of auto-plants to school vacations makes the seasonal adjustments hard to pin down. In the words of Lou Crandall, chief economist with Wrightson ICAP, "We will pay little attention to any surprises."
However, there is reason to put jobless claims into a larger optimistic picture. Low initial jobless claims mean low layoff levels, and in a normal economy, that should correspond with increasing wages. Continuing jobless claims are also at the lowest level since 2000. With the continued trends, either more people should be drawn from the sidelines into the active workforce, or pressures to find and keep employees should raise wages. We hope that both will occur.
As of this writing, most expert predictions for 2nd quarter GDP growth are in the 2-2.5% range after a 1st quarter contraction, and predictions for the July jobs report are around 250,000 new jobs. Housing is choppy but remains on the upswing, and consumer spending and confidence is beginning to rebound slowly. It's possible that collective momentum can drive these upcoming reports higher — firing up the almost constant speculation on the timing of the Federal Reserve's inevitable interest rate hike.
Is it 1973 all over again? Let's hope not, as that was a deeply troubled economic era characterized by “stagflation” (the combination of low economic growth and high inflation).
While the initial jobless claims and unemployment rates are similar (both 5.3%), today we’re looking at a steadily improving economy with little signs of serious inflation. Those of us old enough to remember President Ford's infamous WIN buttons (Whip Inflation Now – a response to the 10.9% inflation rate he inherited from President Nixon, along with anemic growth) see a rosier landscape today.
The jobless claims number should be taken in context. It has to be followed up with a surprisingly high jobs number for July, a continued serious drop in the overall U-6 unemployment rate (including marginally attached workers and the underemployed), and significant GDP growth for the Fed to accelerate action. A late 2015 rate hike is already likely, but extremely positive numbers may persuade the Fed to act in September instead of December, or nudge the rate hike higher than initially planned.
All in all, that seems unlikely. U-6 unemployment is still above pre-recession levels (as is the regular unemployment rate, which was 4.7% pre-recession), and most of the wage hike pressures are localized and externally driven, such as the various minimum wage hikes taking place across the nation.
Fed Chairwoman Janet Yellen has already telegraphed likely rate hikes before the end of the year, but she has also mentioned concerns about the wage growth pattern and the slack in the labor market. In recent Congressional testimony, she said, "While labor-market conditions have improved substantially they are...not yet consistent with maximum employment."
In short: it's good news, but needs to be followed by a series of exceptionally good numbers to make you alter your investing plans in anticipation of a Fed surprise. Keep your powder dry for now.