Unemployment Claims Point to a Better Economy

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by: Arnold Landy

Initial Claims for Unemployment Insurance, a measure of job losses and a useful harbinger of economic turning points, is starting to trend lower and could soon signal an imminent end to the recession. Among the several components of the Leading Economic Index (LEI), Initial Claims data is especially useful as a “leading indicator of the Leading Indicators,” since claims typically rise steadily during a recession, then fall right before a recession ends (usually within 2 months, or less).

Past deterioration in the Initial Claims data shows the worsening of this recession. At the start of this recession in early December, 2007, Initial Claims for Unemployment Insurance were only 340,000. By late June, 2008 the figure was 405,000; rising to 508,000 at year-end and on to its 674,000 peak last month. If Initial Claims continue to fall, as they have recently, then the March peak will have turned out to be slightly lower than the prior post-Depression peak of 695,000 during the recession of 1982, even though the labor force is 40% larger now than it was in 1982. (It was 110 million in 1982, and is 154 million, now.)

The U.S. Labor Department releases weekly claims data every Thursday morning. It is very timely; the data announced April 30, 2009 applied to the week ending April 25. The data are revised one week later, as the figures for the next week are announced , and there are no revisions beyond that. Since the figures are seasonally adjusted and are battered by holiday closings, the appropriate way to look for a change in trend is to compute the four-week moving average, which is a rolling average of the past four weeks. Weekly claims peaked March 28 at 674,000 and the four-week moving average peaked April 4 at 660,000 and has declined over the three weeks since, to 638,000. From the recession’s start in December, 2007, the four-week moving average has fallen three consecutive weeks on only one occasion, around the turn of this year when it was subjected to statistical noise around the holiday season, and has not declined as many as four weeks in a row since the summer of 2007, when the economy was still growing.

So, we await next Thursday’s announcement with anticipation that this decline will continue for a fourth consecutive week. In that happy event, we will gain confidence that the labor market trend has reversed and we can expect to come out of this recession by summertime.

Disclosure: No stocks are mentioned in this article.