Despite a Drop in Jobless Claims, the Economy is Still Not Well

by: James Picerno

The scent of recession may be in the air, but it's not yet creating a stink in jobless claims.

Last week, the Labor Department reported that new filings for jobless benefits fell to 317,000, the lowest level in a month. As you can see from the chart below, the trend doesn't look particularly ominous. In fact, it looks quite middling by the standard of recent history.

The future may bring darker trends, but for the moment the status quo prevails. In fact, it's not too hard to find an economist who'll tell you that initial jobless claims running consistently below ~330,000 a week suggests a bubbling U.S. economy. And while we're looking at trends, let's not forget that initial claims have now fallen for three weeks running.

"It's still consistent with a moderate expansion of the labor base." Richard DeKaser, chief economist for National City Corp. in Cleveland, told Reuters on Thursday.

But let's not get too excited. Jobless claims numbers do not necessarily dispense timely warnings far in advance. Going back to the last time Wall Street and the economy ran into trouble, it's worth remembering that initial jobless claims stayed calm long after the stock market bubble burst in March 2000. It wasn't until December of that year, and into the first quarter of 2001 that jobless claims reflected the dangers that had been brewing for some time.

Of course, every economic challenge is different. The troubles stalking the economy these days are of a slow-moving variety. The on again/off again nature of the current creeping threat can all too easily lull investors to thinking that the storm has passed. Indeed, investing perspectives have been whipsawed in recent months. Rest assured, more of the same is likely.

"Any major changes in hiring and firing may not be seen for a few more months," Joel Naroff, president of Naroff Economic Advisors told Bloomberg News. "The full impact of the housing losses on financial firms and their reactions to their lower earnings are still to be felt."

In any case, initial jobless claims aren't the only statistic in town. Competing with the encouraging news from the Labor Department is the increasing gloom in the retail sector. As earnings reports fall short of forecasts, the trend in spending seems headed down. On Thursday, via the AP, Ken Perkins, president of RetailMetrics LLC, said that, "Overall, the sales trend continues to slow. I think the consumer is certainly feeling the (economic) pressure heading into the holidays.

Any one number may or may not confirm the broader trend on any given day. But no matter the statistic du jour, it's getting harder to see how the economy evade a slowdown this time. And therein lies opportunity. Once everyone buys into the idea that the economy will weaken, the expectations will be lopsided once more. At some point, strategic-minded investors should be putting cash to work. Not yet, and perhaps not for some time. There's more bad news to come, of that we're sure.

Gauging maximum pessimism is more art than science, of course. The good news is that you don't have to call a bottom precisely in order to profit from it. But for now, patience.