Thursday, March 25, 2010

Unemployment claims continue to decline

After some setbacks in January and February which led the market to question the durability of the recovery that started last summer, unemployment claims have resumed their downtrend. The recovery is still underway, even though progress on the labor front remains painfully slow. Markets have been climbing walls of worry, and each worry—such as the January upturn in claims—has been resolved satisfactorily, allowing equity prices to march slowly higher.

Expect this process to continue. The recovery in equity prices is based primarily on mounting evidence that the economy's recovery is genuine, albeit less than dramatic.

1 comment:

John said...

This is good news. One thing I think the markets clearly want to see is falling unemployment to stimulate longer term gdp growth. I believe this is one of the precursors of that occuring.

I found a little information on the relationship between interest rates (fed funds) and the unemployment rate.

In the 1990-91 recession unemployment peaked around 8% in June of 1992 (unemployment lags economic recovery) and the initial fed rate hike occured in February 1994 20 months after that.

In the 2001 recession unemployment peaked a little over 6% in June of 2003 and the initial fed rate hike occured 12 months later in June of 1994.

So in the past two cycles the lag between the peak in unemployment has been many months. I don't have the exact date our unemployment rate peaked this time but I believe it was about november of last year. I believe it was just over 10%.

Every cycle is different but they often rhyme. We have had a much deeper recession this time but the monetary policy has been much more aggresive (read quantitative easing). It appears to me much of this is going to be unwound much sooner but the higher unemployment rate argues that the fed may delay initial rate increases for longer. Maybe even into next year. Another possibility is a quicker bump to something near 1% and then holding until unemployment is clearly falling rapidly or inflation rises. Either way it looks to me like Uncle Ben is our friend for quite a while longer.