No Reason to Cheer Drop in Jobless Claims

Recent drops in new jobless claims may not portend an economic turnaround.


They say that good news travels fast, and perhaps nowhere is that more true than in the world of global economics. Today, the Department of Labor announced the second consecutive weekly drop in initial unemployment insurance claims, causing an almost immediate bump in stock prices and a strengthening of the dollar against foreign currencies. Looking beyond the immediate effects, is this a sign of a prolonged turnaround in the nation's economic fortunes?

The short answer is "No."

The latest drop needs to be put in a broader context of what is happening on the jobs front. Today's announcement showed that the number of new unemployment insurance claims for the week ending May 14 was 409,000, down from 478,000 claims during the week ending April 30 and 438,000 the following week. While such a large and rapid two-week drop is reassuring, it also comes on the tail of a larger spike in jobless claims--new unemployment claims grew by 74,000 in the two weeks prior to April 23 (all figures reflect seasonally adjusted numbers).

All told, today's jobless claims number is right around the 2011 average of 412,000, and is well above this year's low of 375,000, from the week of February 26. And the four-week moving average, which smooths out volatility in the jobless figures, shows an increase of 1,250 jobless claims from the previous week's average.

Combine that with a sluggish housing market and the unemployment rate inching up from 8.8 to 9.0 percent in April, and the large drop in jobless claims suddenly looks much less rosy.

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As with most economic data, the latest jobs number does reflect improvement on the jobs front, albeit at a modest pace and one that leaves the situation far worse than that prior to the recession. The economy added nearly a quarter million jobs from March to April, and has added over 1.3 million jobs over the past year. Unemployment is also down 0.8 percentage points from April 2010. Additionally, the statistics for initial and continuing unemployment insurance claims, as well as the unemployment rate, have all generally trended downwards from their respective peaks in 2009.

The bottom line: "The economy, as it has been for a long time, it's struggling," says Allen Sinai, chief global economist at research and advisory firm Decision Economics. "It's improving, but it's improving at a very low pace."

That improvement is also not noticeable everywhere. Broad, comprehensive figures like jobless claims and unemployment rates mask a more complex picture of the U.S. economy's strengths and enduring weaknesses.

Sinai says that jobs in some industries are gone for good. "For a lot of companies, getting rid of people is a good thing--it cuts costs. Wherever workers can be displaced by technology, their prospects are very poor." Retail in particular, he says, is an industry finding that it can get by with fewer people, as many companies have shuttered outlets and are increasingly selling their goods online.

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Gus Faucher, director of macroeconomics at Moody's Analytics, also points to the public sector as one area still shedding jobs, as state and local governments face budget crises continue to lay off workers. "We'd be adding even more jobs per month if state and local governments weren't cutting employment," he says. The latest data shows that, from March to April 2011, the United States lost 24,000 government jobs altogether, led by 8,000 jobs in state governments and 14,000 in local governments.

On the positive side, according to Faucher, manufacturing employment is seeing gains as individuals and businesses increase their spending. "Manufacturing employment bottomed out in 2009, but we actually have seen some gains in 2011. Stronger auto sales and tech equipment [sales] as businesses make investments" are two factors improving that sector's health, he says. He also points to the business and professional services sector, which includes areas like law, accounting, and advertising, as benefiting from increased business spending.