The Labor Department released its weekly initial and continuing unemployment claims yesterday.  Overall, the Department’s figures paint a picture of a recovered economy, with initial seasonally adjusted claims sitting at 372K and continuing claims at 3.245 million.

Over the course of the entire year, initial claims have declined by about 11K from the 2011 year end of 383K; continuing claims also exhibited the same pattern, declining by 361K from 3.606 million at the end of the prior year.

initial claims with s&p500

For investors, the overall condition of the initial and continuing claims figures has coincided with reasonably good equity market performance.  In fact, when looking over the historical relationship between initial claims and the S&P 500 (S&P Indices:.INX)  index, the relationship has become generally stronger since the development of the relationship in the late 90s.

initial claims with s&p500 since 1996

So, what do the latest initial and continuing claims figures portend for equity market performance through 2013?  Well, it largely depends on how long you think the economy can float around the bottom.  One thing appears reasonably assumable: the strong decline in initial claims since early 2009 are more than likely over.

How long can the economy float around the bottom?  The current float has been going on for about a year (with a little improvement since the prior year).  In the prior boom period, claims floated around bottom for about two years (2006 and 2007).  Prior to the prior recession, initial claims only floated around bottom for about a quarter in 2000 before conditions deteriorated.  When looking back at the entire history, the longest period of time for claims to float around bottom has been about two years.

Does this mean that 2013 is likely the end of the recent recovery period (or more aptly put, the slowdown period before the recession)?  If it is, the impending year-off recession would amusingly coincide with effects of the tax increases imposed by the Federal government’s inability to manage costs.  And, interestingly, this conclusion is arrived at by excluding any analysis of policy impact; rather, only by looking at the historical behavior of initial claims figures.

Is the conclusion likely correct?  Well, of course, individuals and businesses don’t know, although the probability of claims rising over the coming year is increasing now, not decreasing.  One thing is certain though: the historical behavior of initial claims with equity market performance should give investors some reason for caution in the coming year.

Overall, initial and continuing claims improved at a decelerating rate through 2012.  The deceleration should act as a sign of concern for individuals worried about the historical behavior and relationship of initial claims with equity market performance.