With each new data point on weekly jobless claims, the theory that the recent jump in filings is temporary grows stronger. Last week’s claims fell 16,000 to a seasonally adjusted 414,000, the lowest in a month and well below the recent peak of 478,000. That’s still too high to inspire much confidence about economic growth or the future of job creation, but it’s getting tougher to argue that a new recession is here based solely on this data series. True, this is just one number, but it’s an important leading indicator. If the economy is contracting, or set to contract, it’s likely that there’d be a clear sign in jobless claims. For now, the worst you can say is that the numbers in new claims are ambiguous.
Despite April’s surge in jobless claims, the broader message is that new filings are basically unchanged since the year started. That’s discouraging since the level is still elevated. A kind interpretation of what’s happened over the last two months is that jobless claims dropped an early clue that the economy is facing a fresh round of headwinds, as revealed by the late-April spike (black line in the chart below). The warning was more than subtle, as we noted at the time. With the benefit of two additional months of jobless claims data, however, the case for seeing a rough patch rather than a recession is still a viable perspective.
Another view of jobless claims is looking at the trend in unadjusted terms on a year-over-year basis, which cuts out the short-term noise. Here too the numbers have pulled back from the brink. Unadjusted claims last week were nearly 12% lower vs. a year ago. This is one metric, at least, that’s a long way from screaming another recession is ready to pounce.
As noted earlier today, there’s still room to debate the near-term future for the business cycle based on other indicators as well. Consider, too, that the Philly Fed’s Aruoba-Diebold-Scotti Business Conditions Index suggests that while the trend has weakened recently, it seems to have stabilized.
Nonetheless, there’s still a big distinction between a) finding it difficult to locate clear and authoritative quantitative evidence that an economic contraction is imminent and b) seeing a rosy future. Macroeconomic Advisors lowered its forecast of U.S. GDP to an annualized 1.9% for the second quarter, down sharply from its earlier 3.5% prediction, according to a story in today’s New York Times.
In the same article, an economist at another firm worries that the fallout from the deteriorating conditions in the crisis in Greece has global repercussions. “The concern is that a default by Greece would not only hurt European banks but could also spread to U.S. banks,” says Bernard Baumohl, an economist at the Economic Outlook Group and author of The Secrets of Economic Indicators. “Should there be a default, it can only have a delaying effect on the recovery, hurting American exports and the banks’ ability to lend.”
It’s been clear for more than a month that the U.S. economy is under a new round of stress, and recent events don’t offer much hope for changing that view. What’s been debatable all along is whether the stress will kill the recovery. It remains an open question. Still, we can’t dismiss the threat. The fact that job creation—perhaps the single-most important economic number these days—took a sharp dive last month is reason enough to take this threat seriously. If the next employment update shows an equally weak or worse report for June, that would weigh heavily on expectations for what happens next.
Meantime, this is an evolving situation, as they say, and so far the numbers we have to date reflect trouble but it’s not obvious that it’s enough trouble to do more than slow the recovery. The case for modest optimism may take a hit in the weeks ahead, of course, but not yet.