Never say never in macroeconomics, especially when it’s based on one economic indicator. But the longer that initial jobless claims zig zag lower, the harder it’ll be to maintain a recession forecast. One thing is sure: either the revival in the labor market in recent months is one giant head fake, or the handful of analysts telling us (still) that a new recession is imminent will soon cry “uncle.” Meanwhile, the data continues to give the forces of growth the edge, and today’s weekly update on new filings for unemployment benefits only strengthens the case. Indeed, new claims dropped last week by a healthy 15,000 to a seasonally adjusted 358,000. That’s the second-lowest reading since early 2008 (the lowest reading was for a week last month). More importantly, the latest numbers strongly suggest that the downward trend is intact. That's a crucial factor for this leading indicator, which has a good record of telling us when the economy is weakening.
Maybe this time is different, but history shows that every recession since the 1970s has started with rising levels of jobless claims. And not merely a subtle increases, but clear and distinct pops. By contrast, the trend of late is exactly the opposite. There’s simply no way to misread this indicator: it’s signaling that the labor market will continue growing, perhaps at a moderately faster pace than what we’ve seen so far, but growing nonetheless. Yes, the claims numbers could be wrong, but it would be the first false signal since the government started publishing this data in the late-1960s.
What’s more, the descent in jobless claims isn’t an artifact of seasonal adjustment. As the second chart shows, unadjusted claims have been dropping consistently on a year-over-year basis since last spring, and nothing's changed as of last week.
The claims numbers would be a lot less compelling if there was lots of conflicting evidence that the economy is crumbling. But you don’t have to look too hard to find sources of optimism elsewhere. As I noted last month, the December numbers generally looked pretty good, or at least good enough to debate the forecast that a new downturn was coming. In the subsequent weeks, the updates have continued to offer encouragement. Examples include the surprisingly strong rise in private payrolls for January, which, by the way, still looks good even without the seasonal factor; and manufacturing activity continued to perk up last month. I’m still worried about consumer spending and income, but if jobs creation can remain positive this risk may fade too. A more potent problem is the higher recession risk in the eurozone and the UK. Will those threats infect the internal dynamics of the U.S.? Stay tuned.
Meantime, there’s a danger of obsessing over the labor market as the key factor for anticipating the health of the business cycle. Monitoring and evaluating a wide array of indicators is essential. But it’s also clear that there if there’s any hope of skirting a new recession, the odds for success are closely tied with the ebb and flow of the jobs market—more so than ever.
"It does look like with these [jobless claims] numbers that the labor market is on a positive footing, which is good to see,” Sean Incremona, an economist at 4CAST, tells Reuters. “Job creation is probably going to be what keeps this recovery alive. Things do seem to be holding up somewhat better than we had expected.”
Millan Mulraine, a strategist at TD Securities, agrees: “The recent positive momentum over the past two months is being sustained. If we stay within this range, then we should see employment growth pick up.”
There’s no guarantee, of course, but if deterioration is brewing that will take down the broad trend, it’ll soon be obvious for all to see. For now, however, the odds of new recession look fairly low based on the latest set of numbers for new claims and a range of other indicators.