As with every other Thursday, today brought two new pieces of information to labor market observers – the initial and continuing unemployment claims figures. On the surface, the Labor Department’s figures paint a pretty rosy picture, with initial claims declining to a near four year low at 343 K and continuing claims dropping to 3.198 million from 4.421 million four years ago.
Should investors be worried about the rosy picture? Well, probably.
First on the initial claims side, the seasonally adjusted figures decline to 343 K represents the second lowest reading of the year, following a 342 K reading in the first week of October (before Sandy caused the temporary spike in unemployment claims in November). On the whole, initial claims are down about 40 K over the course of the entire year, or about 12 percent.
Why isn’t this good news? Well, when considering only the improvement side of things, it certainly is, but there’s also a component of risk.
Initial claims have been declining for over three and a half years since their March 2009 peak of 667 K. Given that the bulk of the initial claims side of the labor market has already taken place, one has to ask: how much longer can the improvement last?
In looking at previous peak to trough lengths of time, at the moment the labor market, as measured by initial claims, is somewhere in the middle of past experience. Since 1970, there have been five broad cycles in the initial claims figures, the longest of which was from February 1991 to April 2000 (a little over nine years) and the shortest of which was from April 2003 to January 2006 (a little less than three years). The current recovery is approaching its fourth year, which would put it as a better recovery than the 1975 to 1978 recovery, but two years behind the 1982 to 1989 recovery of six years.
In all, anyone that thinks peaks and troughs are still part of the economic experience must have at least a little concern that the 1980s or 1990s experiences probably won’t be repeated here, at least not with the current discussions of large tax liability increases on the horizon.
On the continuing claims side, the same general trend holds, although the overall picture doesn’t look as good. What does appear readily apparent is that any substantial improvement in either of the figures is unlikely in the coming year given the improvement that has taken place over the prior four years.
Overall, the recent initial and continuing claims figures paint a reasonably rosy picture of an improving labor market. But, as any professional analyst will tell you, labor markets generally come with peaks and troughs and it sure looks as though the initial and continuing claims figures are hovering around trough territory. We’ll see what happens in the coming year, but one thing is pretty certain – there’s more downside (meaning initial and continuing claims increase) than there is upside at this point in the game.