Thursday, August 23, 2012

Claims data shows no sign of recession

Real-time, market-driven data such as Treasury yields and swap spreads are arguably the best things to watch for clues to the economy's health; they can't be manipulated, they embody the collective wisdom of millions of market participants, they aren't subject to faulty seasonal adjustment, and they are never revised after the fact. The next best thing are weekly statistics (high-frequency data), with initial claims for unemployment being arguably the best. Claims data comes with a 1-2 week lag, and sometimes is subject to faulty seasonal adjustment, so it's not perfect, but it is very timely compared to many other statistics.

As these two charts show, as of a week ago there was no sign whatsoever of any deterioration in the labor market. On an adjusted basis, weekly claims have been relatively flat so far this year; on an unadjusted basis, claims last week were 10% below their year-ago level. If the economy were healthier, claims would be lower—we would be seeing numbers in the 300-350 range, instead of the 350-390 range that has prevailed this year. But that's not a huge difference. If the economy were tipping into recession, we would be seeing claims rising, but that's not the case at all.

Meanwhile, the number of people receiving unemployment insurance benefits continues to decline: down 17% in the past year, or 1.1 million fewer people. This means that there is an ongoing improvement in the incentives that the unemployed have to find and accept jobs. Unemployment insurance is a nice "safety net," but the truth is that getting a weekly check for not working reduces one's incentive to find another job, especially if the new job pays less than the old job. Unfortunately, recessions happen when the economy's resources are no longer being efficiently utilized—when resources such as labor have to be shifted from one are to another, or adjust to new pricing realities. In short, unemployment claims retard the recovery process because people naturally resist taking a new job for less pay than they received before. So it's good to see the ongoing decline in the number of people receiving claims.

Claims data shows no sign of recession and is consistent with an economy that continues to grow, albeit slowly.

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