What Are Initial Jobless Claims Really Telling Us?

by: Lance Roberts

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Initial jobless claims fell a sizable 23,000 in the December 3 week to 381,000, their lowest level since February. Of course, we can't forget to revise up the past week, as we do every single week, by 2,000 to 404,000. There are no unusual factors in the data though the unadjusted week-to-week increase for the post-Thanksgiving week is the largest of the year, a factor that seasonal adjustments smooth and one that clouds the results a bit. A clearer positive is the four-week average of 393,250, down 3,000 in the week and at its lowest level since April.

This is good news as an "initial jobless claim" is when somebody applies for unemployment benefits for the first time. If initial jobless claims are rising, then this means that work is harder to find. If initial jobless claims are falling, then the economy is strengthening and there are more jobs to be had. Well, at least in theory.

This past week there were 381,000 people filing unemployment claims for the first time. These individuals are now among that masses of the unemployed that will remain there until they either gain employment OR they exhaust the entirety of their unemployment benefits. However, take a look at the individuals that have abandoned the search for work because they believe that no job is available. At this point these individuals are classified as the "discouraged " where they are no longer counted. This is the category that tells us a little different story than the initial claims number.

A discouraged worker is a person of legal employment age who is not actively seeking employment or who does not find employment after long-term unemployment. In other words, even if a person is still looking actively for a job, that person may have fallen out of the core statistics of unemployment rate after long-term unemployment and is therefore by default classified as "discouraged" (since the person does not appear in the core statistics of unemployment rate).

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While the "initial claims" number has been falling the number of individuals that have given up looking for work has been on the rise, climbing from a low during May of 883,000 to 1,096,000 in November. This goes a long way to explain why the number of individuals that have fallen into uncounted masses have just reached a new historical record of 86,558,000 individuals with an increase of 487,000 in the month of November alone. If we subtract out the entire estimated growth of the population for the month of November (roughly 200,000) that means that roughly 287,000 individuals fell off the employment rolls in one month. This is a large reason that we saw the "official" unemployment rate fall to 8.6% in the most recent reporting period.

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Another statistic that tells us a different story than the recent decline in claims is the number of "New Entrants" being actually counted as unemployed.

For the month of November, not surprisingly due to seasonal hiring, the number of new entrants declined from 1.29 to 1.27 million individuals. The issue here is that we are still hovering near the high of 1.35 million at the beginning of this year.

But what about those individuals that used to have a full time job but have families to support and bills to pay. Contrary to popular belief that when people lose their jobs they just sit at home and collect unemployment and welfare checks; there are many who will do whatever is necessary to take care of their families and responsibilities. In America the work ethic still is very much alive and these individuals take one, two and three part time jobs to make ends meet. The number of those who are working part time for economic reasons is still hovering at historically high levels after reaching an all-time peak in 2010 of 9.5 million.

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This also skews the employment report to a degree because these individuals are counted as employed. However they are working for significantly less income than they did previously.

David Rosenberg, in his daily missive, pointed this out today stating: "We are losing financial jobs, which pay 13% more than average (this does not include bonuses). We are losing construction jobs, which pay more than 20% above average. And now these folks are switching to retail, where the pay is 20% below average and leisure where it is 30% below average."

So, while the initial claims number may show improvement let's keep reality in check. The migration of workers into the abyss of the uncounted masses and the shift of full-time higher paying employment into part-time, temporary, hires ultimately diminishes consumers' ability to support the economy through spending as we noted yesterday. While tourism and travel is an area of employment that is booming these are also the lowest wage jobs in the economy. As incomes decline so does the rate of personal savings.

With personal savings rates are in a sharp decline the impact point will come sooner rather than later. Finally, it is also important to remember that many of the jobs that have been lost are never coming back and the issue of "structural unemployment" is an anchor on the economic recovery going forward. As I stated - while the decline in "initial claims" is certainly welcome news it just doesn't tell us much about what is really happening within the economic fabric of the country. Keeping a perspective on the broader picture will prove to be much more useful.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.