Initial Claims for Unemployment Insurance continue to hover just above the key 400,000 level. This week they fell by 6,000 but only after the previous week was revised up by 5,000. So regardless if you count it as a drop of 6,000 or 1,000, we are still at 403,000.
This was slightly better than the expected level of 404,000. Basically, no change and in line with expectations. We can’t seem to break through the 400,000 level and stay there, but at least we are staying in the vicinity. If the current level can be sustained or even improved upon (a big "if") this could be signaling better job growth in October.
Unemployment held steady at 9.1% in September despite net job growth of 103,000. The participation and employment rates actually ticked up for the second month in a row, but this summer they were coming off the lowest levels since 1983.
The employment report is composed of two separate surveys. The household survey was much more upbeat in August than was the establishment survey, and pointed to a gain of 398,000 jobs. However, the establishment survey is generally considered the more accurate of the two.
4-Week Moving Average Lowest Since April
Since claims can be volatile from week to week, it is better to track the four-week moving average to get a better sense of the trend. It fell 6,250 to 403,000, its lowest level since April, and now well within range of that key level. Over the last year, the four-week average has dropped by 50,500 or 11.1%, and off 38% from the mid-2009 peak.
The big question is: can we get below the 400,000 level and stay there? There are a lot of pressures slowing the economy, with a more concretionary fiscal policy at all levels of government at the top of the list. The forces of fiscal contraction are scheduled to become far more intense starting on New Years Day. Thus, even if we do manage to continue to see improvement over the short term, we might find the better levels hard to sustain next year.
Still Growing, Officially
The economy is growing but very slowly, and while private sector job growth in the first eight months of this year are almost double the job gains of the first eight months of 2010 (1.341 million vs. 735,000), it is not enough to put a dent in the huge army of the unemployed. Those gains have been offset by a faster pace of government layoffs (267,000 vs. 211,000).
The September employment report was better than expected, and a relief after the disastrous August report. The August numbers were also revised substantially higher, so it turns out that while it was bad, it was not quite as awful as we had thought. In September, the private sector created just 137,000 jobs, offset by the loss of 34,000 government jobs.
The unemployment rate was unchanged at 9.1%, but the employment rate — or the percentage of the population over age 16 actually working — rose to 58.3% from 58.2% in August, the second increase in a row. The increase was good to see, but July was the lowest level since 1983, and at that point the movement of women into the labor force was not yet complete.
The first graph (from this source) shows the long-term history of the four-week average of initial claims.
So why is the 400,000 level so significant? The next graph shows why. Historically, that has been the inflection point where the economy starts to add a lot of jobs. It layers over the monthly gain or loss in private sector jobs (red line, right hand scale) and total jobs (blue line). Unfortunately, the automatic scaling did not put a line at zero for the job growth line, so you will have to eyeball it a bit.
Notice the strong inverse correlation between job growth and initial claims, and how when the blue initial claims number is below the 400,000 level that job growth is strong. OK, it is not that an increase from 399,000 to 400,000 is all that much of a difference than from 397,000 to 398,000 or from 402,000 to 403,000, but big round numbers are psychologically important, especially when that round number is near a historical inflection point.
We are making progress in getting down towards the 400,000 level. In the last two recoveries, when it got below that threshold, that job creation really started to take off.
The recent other data has been consistent with relatively strong economic growth in the third quarter, well above the pace of the first half. Generally, we need GDP growth of over 2.0% to see the unemployment rate fall, and we will probably see that in the third quarter. There is a good chance that the momentum carries through to the fourth quarter.
However, the first quarter may not look nearly as good. At this point, over 85% of the population is going to be hit with a 2% reduction in after tax incomes as the payroll tax cut expires. In other words, someone earning $50,000 will be hit with a $1,000 reduction in their paycheck, and the $100,000 earner a $2,000 drop. That will reduce spending and with it, employment.
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