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Implications of continuing high initial claims [ClearOnMoney]
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Implications of continuing high initial claims

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Commentary

Implications of continuing high initial claims

14 May 2010 by Jim Fickett.

Initial claims seem to be stuck at roughly 450,000 per week. This level of claims is consistent, historically speaking, with monthly changes in non-farm payrolls of between roughly -420,000 and 180,000 (compared to the actual most recent change of 290,000, or 224,000, without the temporary Census hiring). The historical correlation suggests that either initial claims will finally begin to drop further soon, or the growth in non-farm payrolls will falter.

Every Thursday, when the new data on initial unemployment claims comes out, one sees worried comments about the current level, which seems to be stuck in the neighborhood of about 450,000. But these worried comments, which generally imply bad things about growth in jobs, are rarely quantitative.

Below is a scatter plot (1) the month-to-month change in non-farm payrolls (NFP), against (2) the monthly average of initial claims. Both are seasonally adjusted, and both are adjusted for population (that is, the numbers are scaled up by the ratio of the current population to the population at the time of measurement).

There are a couple things of which to be careful, in interpreting initial claims data. First, the laws governing unemployment compensation change regularly and significantly. I have only used data since 2000, since that was the date of the last major change of which I am aware.

Second, not everyone who becomes unemployed makes an unemployment compensation claim, and not all are approved. The ratio of initial claims to all people who lose their jobs has changed over time. The Federal Reserve Bank of San Francisco gave a nice overview of the issues involved, and this graph:

Since the take-up ratio has been generally increasing over time, I've plotted the first five years in one color and the second in another, to check for any difference in trend. But on this timescale it seems there is no difference.

With those caveats taken care of, how do we interpret the data?

First, the latest (Apr 2010) point, the open red diamond towards the upper right, is clearly a bit of an outlier.

Second, for initial claims of 450,000 – the vertical dashed line segment on the graph – the scatter plot would indicate a normal range of monthly changes in non-farm payrolls of perhaps -420,000 to 180,000, with the regression suggesting a change in non-farm payrolls of about -110,000. That is not very encouraging

The neutral growth rate for non-farm payrolls is a monthly increase of about 110,000 (the result of multiplying the current rate of growth of the total population by the size of the workforce). The solid horizontal line segment in the graph is at a level of 110,000. So, third, the scatter plot suggests that this neutral growth rate is consistent with a range in initial claims of roughly 310,000 to 460,000. Thus the current level of initial claims is consistent with (but just barely consistent with) neutral growth in jobs.

Overall it looks as if an adjustment is quite likely – either initial claims will drop, or non-farm payrolls will grow more slowly.