Thursday, August 19, 2010
The top chart shows the seasonally adjusted version of first-time claims for unemployment, while the bottom chart shows the actual number of first-time claims. The one that's reported and commented on is the top one, while most people ignore the bottom one.
The story behind today's unexpected rise in claims to 500K is that actual claims didn't fall by as much as the seasonal factors expected. Yes, in the most recent reporting period, claims actually FELL by 22,600, whereas the reported number (seasonally adjusted) showed a rise of 16,000.
I have never believed that week-to-week changes in unemployment claims hold any significant information content, because for one, claims are subject to the vagaries of seasonality and faulty seasonal adjustment factors, and two, the economy rarely changes on a dime, from one week to the next.
Looking at the bottom chart, I can't find any evidence suggesting that the labor market has suddenly deteriorated. Note that the rise in actual claims in early July translated into a big seasonally adjusted decline. In other words, actual claims in July failed to rise by as much as the seasonal factors expected. Well, today's number could be simply the flip side of that number: claims failed to fall by as much as expected. In seasonally adjusted terms, the recent rise in claims could just be "payback" for the July decline. We'll have see what develops over the next few weeks, of course. But I think it's premature to jump to the conclusion that the labor market has suddenly taken a turn for the worse, just as it was premature to think that the big decline in claims in early July was a sign of dramatic improvement in the labor market.
Reading the economic tea leaves is never as simple as watching one series for ups and downs. You have to take into consideration a number of factors, and look for consistent patterns that tie them together. For my money, I think that recent strong growth in commodity prices, coupled with the strong growth in industrial production, strong growth in corporate profits, strong growth in shipping and rail activity, and the ongoing decline in corporate bond yields and spreads, suggests very strongly that the economy on balance is on the mend, albeit relatively slowly. To be sure, construction has yet to really improve, and the labor market is still distressed, but you can never expect everything to move in a straight line and at the same time. For that matter, the labor market is typically the among the last sectors of the economy to participate in a recovery.
Posted by Scott Grannis at 9:57 AM