Unemployment: The Number to Watch

By Patrick Watson

Amid all the so-called “green shoots” that persuade some people the economy is on the road to recovery, employment numbers are conspicuously absent. Yet unemployment is really the core problem in many ways. Jobless people don’t spend much money, they certainly don’t add money to savings, and they generate additional costs for the rest of society.

Each week, normally on Thursday morning, the U.S. Department of Labor publishes data gathered from the state agencies that process claims for unemployment insurance. I keep a close eye on these numbers because they are a key indicator of where the economy is going. As with all statistics, there are many assumptions and adjustments that can be misleading, but the broad trends that you see over time are very useful. And right now, they aren’t good.

The weekly report from DOL has two key numbers: initial claims and continuing claims. Initial claims represent the number of people who applied for unemployment benefits in the week being reported. The report released today covers the week ended May 23, and reveals that 623,000 people applied for benefits that week.

Keep in mind that applying for benefits doesn’t mean you will receive benefits. Not everyone in every situation is eligible for unemployment insurance, and the rules can vary between states. Nor does this number tell us anything about how long these people have been unemployed or how long it will take them to find a new job. It’s just a one-time snapshot of what happened in one week.

Continuing claims is the number of people who were actually receiving benefits during that week. This number stands at 6,788,000 as of May 16. By next week some of those people will find jobs and leave this list, newly unemployed people will be added to the list, and people who remain jobless will stay on the list. The net result, unfortunately, is that continuing claims have been climbing quickly.

This chart, from the excellent Calculated Risk blog, shows you the historical trend in both initial claims (blue line/right scale) and continuing claims (red line/left scale) since 1971. (Click here for a larger version.) Note the huge spike in the last year. It dwarfs previous recessions partly because the population has grown over time, but is still startling. The downturns in 1974-75, 1979-82, 1989-91 and 2000-2001 look mild in comparison.

Despite what you may hear, the economy cannot recover until the number of unemployed people begins to fall. And for that number to fall, it must first stop rising. There is absolutely no evidence this is happening. In fact, the problem gets worse nearly every week. Keeping an eye on these numbers is an excellent way to immunize yourself against rosy-scenario forecasters.

Comments

[BookValue:]

Ron, you are the classic example of Mark Twain's quote about statistics. Are you aware that the US population is 44% higher now than it was in 1974 and 33% higher than it was in 1982? On a population adjusted basis, the employment statistics you tout for the 73-74 and 81-82 recessions are much, much worse.

If you would stop for a moment and look at the trend in the initial jobless claims number, you will note that it is now declining from its high and is below it's 4-week moving average. This is one of the best leading economic indicators for the turn in economic activity.

May 29 08:55 AM

[thiazole:]

This is just wrong. Look at a chart of the unemployment rate vs GDP. The GDP ALWAYS turns before unemployment - ALWAYS. These aren't unprecedented unemployment levels, either. It was just as bad in 74-75, yet the GDP still turned before the unemployment levels came down. It just isn't logical to expect companies to start hiring again if no one is buying their goods.

Now if you simply stated that initial claims needs to come down from its high on a 4 week moving average before the recession can end, then that is correct. Initial claims has always been a very good leading indicator in that respect.

I think why people don't understand this is that they equate a "recovery" as meaning the economy is back to where it was BEFORE the recession - yes, you probably need a lower unemployment rate to get back to that level, but that isn't what a recovery means. A recovery is simply when the GDP starts to grow again. It is still much smaller than it was, but it is growing again. You don't need low unemployment to support the newer smaller GDP. As it grows, more people will need to be hired to support it.

May 29 09:52 AM

[Larry House:]

I agree totally with your view on the importance of the unemployment numbers. It seems everyone wants to just dismiss what is happening with unemploymnet because it is a "lagging indicator." Hogwash! Rising empolyment is necessary for growth! As longs as unemployment is rising, consumers are scared and on hold, and less will be manufactured. Employment is where the rubber meets the road in the economy.

May 29 10:13 AM

[mxd:]

Initial unemployment claim will be lower at some point as businesses (employers) run out of people to lay off. Wall street will take a lower number as sign of economic improvement.

May 29 10:14 AM

[hellothere4:]

Continuing claims does not capture individuals who have exhausted their benefits. Also, important to note when evaluating the official unemployment percentage, U3, backwards to prior recessions 73-74 and 81-82 - that the formula for measured unemployment was reconstructed in 1995. Stripping out the marginally attached, and the discouraged workers.

Take a look at U6, which includes all these. It's over 15%.

You can see the unemployment impact in the delinquency rate of now prime borrowers (mortgages)....now 9%.

May 29 10:38 AM

[Konrad:]

Unemployment is reflective of the individuals who have just recently lost their job and still have the ability to claim benefits. If the number rises above seasonal variances from past years and past recessions then we have a problem. While new claims rise in comparison to prior month's or week's claims there will be no recovery, period. When the numbers slow and stop it will be your first indicator of the market beginning to rectify itself.

What I would like for you to answer is how do companies who have substitutes in this economy, or who have outsourced large numbers of their positions abroad begin posting higher cash sales while the consumer base has LESS money to buy their goods and services with. In response to which the same companies had to lower their pricing.

Part of it is going to come from WMT no doubt as they offer valid substitutes at lower prices, so perhaps WMT will hire more people. I can't wait to see the spending patterns of their employees - most of whom make minimum wage. Makes me want to invest in "Cup O Noodle" companies and WMT itself.

Obviously you will see a GDP uptick when the unemployment starts falling again. However I doubt there will be one prior to that number's increase stopping.

On May 29 09:52 AM thiazole wrote:

> This is just wrong. Look at a chart of the unemployment rate vs
> GDP. The GDP ALWAYS turns before unemployment - ALWAYS. These aren't
> unprecedented unemployment levels, either. It was just as bad in
> 74-75, yet the GDP still turned before the unemployment levels came
> down. It just isn't logical to expect companies to start hiring
> again if no one is buying their goods.
>
> Now if you simply stated that initial claims needs to come down from
> its high on a 4 week moving average before the recession can end,
> then that is correct. Initial claims has always been a very good
> leading indicator in that respect.
>
> I think why people don't understand this is that they equate a "recovery"
> as meaning the economy is back to where it was BEFORE the recession
> - yes, you probably need a lower unemployment rate to get back to
> that level, but that isn't what a recovery means. A recovery is
> simply when the GDP starts to grow again. It is still much smaller
> than it was, but it is growing again. You don't need low unemployment
> to support the newer smaller GDP. As it grows, more people will
> need to be hired to support it.

May 29 12:43 PM

[Pablo73:]

BookValue, maybe you should READ the post before you jump to criticize. Ron is obviously well aware the population has grown. This is what he said:

>>>Note the huge spike in the last year. It dwarfs previous recessions partly because the population has grown over time, but is still startling. The downturns in 1974-75, 1979-82, 1989-91 and 2000-2001 look mild in comparison.<<<

He does not say that the current situation is worse than past recessions. He says it LOOKS worse on the chart, which it certainly does.

May 29 12:46 PM

[Konrad:]

Beyond that lets not forget that in each given year there will be more jobs created for the younger workers as the older ones retire (at least those who can still afford it) or are laid off in favor of less expensive fresh labor which for the most part can still accomplish 85% of the experienced employees' efficiency. That in itself will have an impact on the over-all unemployment in all sectors.

May 29 01:38 PM

[thiazole:]

Here is a quote from the "Calculated Risk" website linked, just to prove my point:

"Note: continued claims peaked at 5.4% of covered employment in 1982 and 7.0% in 1975. So this isn't a record as a percent of covered employment."

Even though the author claims that unemployment needs to fall BEFORE we can recover from this recession, during BOTH of the above recessions, the GDP turned positive before unemployment peaked.

May 29 02:24 PM

[ain't no fo...:]

Ron, here are some more numbers to watch... Wheeeeeeeee!!!!

usdebtclock.org/

May 29 02:55 PM