Jobless claims lowest since 2008 … now what?

In its weekly press release on Oct. 11, the U.S. Department of Labor reported that initial claims for unemployment insurance fell to 339,000 in the week that ended Oct. 6. This represents a one-week drop of 30,000 and the lowest number of initial claims since Feb. 2008. Of course this is good news, but how good is it? A little context might help clarify it.

The Labor Dept. tracks both initial and continued claims for unemployment insurance. What's the difference? As the names imply, the former measures people who became unemployed during the past week and are collecting unemployment compensation; the latter tallies all of the unemployed who are collecting unemployment. Of the two, the number initial claims provides the most accurate view of what’s happening in the economy right now; the number of continued claims gives a big-picture view of what has been happening in the recent past. Simply stated, How many were laid off this week versus How many are laid off? Of course the two numbers follow some predictable patterns, spiking during recessions and falling during expansions, but we should take a closer look at the two numbers.

Believe it or not, 339,000 layoffs in a week is actually a good sign for the economy as a whole. The U.S. economy is more dynamic than many economies, which has upsides and downsides. One of the downsides is that, even during good times, quite a few workers find themselves in a position to file for unemployment; the average number of initial claims for unemployment insurance during the 2004-2007 timeframe, a solid period of economic growth, was 326,622 per week. The current number of claims, 339,000, is less than 4 percent higher than this average. This is down from the 662,000 claims (104 percent of the average) in March 2009.

Time to celebrate? Well, no. Let’s look at continued claims for unemployment insurance.

As expected, the number of people filing continued claims for unemployment insurance is much larger than the number of those filing initial claims. Continued claims averaged 2.6 million from 2004 to 2007. In May 2009 it peaked at 6.63 million, or 155 percent of its 2004-2007 average. Today it is 3.28 million, a big improvement, but still about 25 percent higher than the recent average.

What does all this tell us? At the risk of oversimplifying it, the number of initial claims is evidence that the economy is close to stabilizing; the number of layoffs now is essentially equivalent to the number of layoffs during the most recent economic expansion. However, the number of continued claims reveals that the economy hasn’t recovered enough to start absorbing large numbers of laid-off workers.

Two more tidbits can really bring the employment picture into focus:

• The unemployment rate is finally below 8 percent; at the end of Sept. 2012, it was 7.8 percent. It peaked at 10 percent in Oct. 2009. (If you really dig statistics, you’ll probably be surprised to learn that the current unemployment rate is close to one standard deviation higher than the average unemployment rate since 1990.)

• The big unemployment rate—the one that includes discouraged workers, part-timers wanting full-time jobs, and so on—is 14.7 percent. It peaked at 17.2 percent in Oct. 2009. It has averaged 10.4 percent since 1994. (The Bureau of Labor Statistics uses six ways to measure unemployment, U1 through U6).

In summary, a big drop in the initial claims for unemployment insurance is a good step, but it’s just one step on the way to a full economic recovery.