Claims settle back down

Sandy disrupted the East Coast economy, but things are getting back to normal. There are still headwinds, however, in the uncertainty surrounding the fiscal cliff, and in the increased tax burdens that will come with ObamaCare.

The chart above of seasonally adjusted first-time claims for unemployment shows how dramatic the disruption caused by Sandy was. It's taken about 4 weeks for things to get back down to where they were.

Arguably, the most important development on the claims front is the ongoing decline in the number of people receiving unemployment insurance. On an unadjusted basis, almost 19% fewer people (about 1.1 million) are receiving unemployment compensation benefits than were a year ago. This is a positive development because it is creating incentives for people to find and accept job offers. On the margin, this will help promote the labor market adjustments (e.g., lower wages) that are necessary for the unemployed to find new jobs where they can be once again productive. When there is a surplus of labor, reducing its cost is a tried and true way of reducing that surplus.

Unfortunately, there has been an uptick in announced corporate layoffs since the November elections. With ObamaCare now on track to be implemented, businesses are taking steps to avoid the extra tax burdens that will come with it, and that means layoffs and downsizing. In addition to layoffs, many companies are taking steps to convert full-time to part-time workers to avoid incurring the burden of having to provide healthcare coverage or incurring the penalty for failing to do so. For some companies at least, this extra cost would otherwise put them out of business. For a quick summary of how all this works, see this article by FreedomWorks.

I suspect that we will see claims moving back up and layoffs increasing somewhat in the coming months, and that is going to slow the economy's modest forward progress. I'm hopeful it won't be by enough to create another recession.