Schwab Guide to Economic Indicators: Jobless Claims

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Schwab Guide to Economic Indicators: Jobless Claims
by the Schwab Center for Financial Research
November 30, 2007

What is it?
The jobless claims report is an employment-trend indicator which summarizes the number of U.S. workers receiving unemployment benefits. Statistics include:

initial claims, aka jobless claims
four-week moving average (of initial claims)
insured unemployment, aka continuing claims
insured unemployment rate, aka jobless rate (Note: This is different from the unemployment rate found in the monthly labor report produced by the Bureau of Labor Statistics.)

It should be noted that the "jobless claims" label is not the official name for this report. The official name is the Unemployment Insurance Weekly Claims report (or UI Weekly Claims report). However, it's rarely referred to that way. Other commonly used labels or nicknames include, unemployment claims or initial claims.

The report is produced weekly by the U.S. Department of Labor for this federally managed, state-run program. This unemployment-benefits program was started in 1935 in response to the Great Depression. Its purpose is to assist laid-off workers and their families, and help cushion the impact of economic downturns.

What is its relative importance?
Medium to high. The importance of this anecdotal indicator of employment trends can be high when economic growth is thought to be near a turning point—up or down. However, it's a volatile report that's frequently revised. The results and their effectiveness can be noticeably skewed by extreme weather, temporary shutdowns and unforeseen events. Despite these shortcomings, many analysts monitor it closely because of its timeliness. Its weekly frequency can help them more quickly gauge the direction and strength of employment and the overall economy. However, it requires an ability to look through the noise in the numbers.

What impact does it have on the market?
The degree to which the number of initial claims meets expectations is typically one of the most influential aspects of the report.

In addition, the market impact can also be affected by a meaningful trend change in the four-week moving average, insured unemployment or the insured unemployment rate. What's helpful to remember is that the directionality of these four statistics has the same economic meaning: higher readings reflect weakness, lower readings reflect strength. It's an inverse relationship.

The overall economic backdrop, and expectations of what is needed from monetary policy and where it's perceived to be headed play a major role with the likely direction of stock prices.

If the trend in initial claims, or for the other readings in the report, is falling in a way that hints employment is overheating, bond prices typically fall (yields rise) on the outlook for greater overall economic demand, potentially higher inflation and an increased chance that the Federal Reserve will hike interest rates. Stock prices may also fall.

Why?

A rise in bond yields can eventually make bonds more attractive once the fall in bond prices settles down. Compared to where the weights of stocks and bonds were in your portfolio, the typical thing to do in response to this change in valuation would be to sell a portion of your stock portfolio and put the proceeds into bonds. Even if corporate profit growth seems supported in this time of strong employment activity, the market will likely see it as being short lived given expectations for impending rate hikes and eventually slower economic growth.

There's a scenario where stocks prices could experience a temporary lift if the economic backdrop is subdued. Suppose the jobless claims report comes to life in a manner suggesting upcoming employment strength during an otherwise weak economic period. This can give a boost to stock prices even with an expected rise in bond yields. That's because the market's expectation of potentially higher profit growth from greater economic demand can initially be the more influential factor in favor of higher stock prices. That is, for a period of time, it can be the more-dominant driver of stock prices, overshadowing the negative impact of rising bond yields (as discussed above). While the renewed strength in the jobless claims report might suggest an eventual need for Fed rate hikes, it probably wouldn't be deemed immediate because of an otherwise weak economic backdrop. It would likely take some time for other economic reports to strengthen in order to validate the existence of an economic recovery.

A weak jobless claims report would typically lift bond prices (reduce yields). Suppose the economy is strong but monetary policy had recently become tight (restrictive). Stock prices could improve on hopes of a halt in the Fed's rate-hike campaign, along with the possibility of a future injection of economic stimulus if the next move by the Fed is a rate cut.

A weak jobless claims report and a weak economy probably wouldn't help stock prices. That's because the chance of recession and reduced corporate profits would likely be the dominant fears.

How is it calculated?
Initial claims represent the number of people filing first-time claims for state unemployment insurance. This is essentially the first request for benefits after being laid off. The level and change are presented on seasonally adjusted and not-seasonally adjusted basis.

The number of weeks a claimant can receive benefits varies by state. In general, the recipient can receive benefits for 26 weeks, with extended benefits (sometimes granted) potentially lasting another 13 to 20 weeks.

According to the Department of Labor, "In general, the Federal-State Unemployment Insurance program provides benefits to eligible workers who are unemployed through no fault of their own (as determined by State law), and meet other eligibility requirements of State law."

The four-week moving average is simply the average level of initial claims for the previous four-week period. This series is seasonally adjusted.

Obtaining unemployment insurance benefits is a week-to-week process. Those filing for benefits after the initial-claim filing are included in the insured unemployed data. That's why this series is also called continuing claims.

The insured unemployment rate or jobless rate is a calculated by dividing the number of insured unemployed by the number of employees that are considered covered or eligible for unemployment insurance. Covered employees represent those working as well as those receiving unemployment benefits.

The insured unemployment data and the insured unemployment rate are reported one-week behind the initial claims numbers. Both are presented on a seasonally adjusted and not seasonally adjusted basis.

How is it used?
Initial claims data are used to detect emerging employment trends. Outsized gains garner attention because they suggest looming employment weakness, which could spread to the rest of the economy. Outsized decreases imply impending employment strength.

This data series is volatile. Extreme weather conditions create commensurate extremes in the data. This can happen for two reasons: either weather conditions prevented people from filing, or it temporarily or permanently put them out of work. Seasonal adjustments sometimes do an inadequate job of capturing seasonal changes. It can take several weeks for the data series to be considered representative of what's really going on in the economy.

Another example involves automakers. They schedule temporary production shutdowns in order to reconfigure plants for the upcoming new-model year for various vehicles. In the past, this was frequently done during the first two weeks of July. During this brief period, many production employees become eligible for unemployment benefits. Yet those shutdowns have now become more spread out over the summer months. Therefore, it can be challenging to determine employment trends from this data during the summer.

The data can also be affected by the timing of holidays. If, due to a holiday, there are fewer days available to file, claims for that week can look unusually low when in reality nothing substantially changed. When the next week rolls around, claims tend to spike.

For these reasons, the four-week moving average tends to garner added attention because of its ability to somewhat smooth out this volatility. Yet it's still imprecise.

To a degree, continuing claims and the jobless rate help provide a snapshot of the overall condition of employment. While the jobless rate can, over time, somewhat track the more prominent unemployment rate found in the monthly labor report produced by the BLS, it has its flaws. The Labor Department provides the following explanation: "[S]ome people are still jobless when their benefits run out, and many more are not eligible at all or delay or never apply for benefits. So, quite clearly, UI information cannot be used as a source for complete information on the number of unemployed." That is, they're not counted as unemployed in this series, but likely would be in the BLS report. Therefore, fluctuations in the jobless rate might not necessarily be reflective of what the trend in the unemployment rate will look like in the monthly labor report.

When is it released?
The jobless claims report is usually released Thursday morning at 8:30 Eastern. It can be found at the Labor Department's home page within the "Latest Numbers" section located at the bottom. Click on "Unemployment Initial (UI) Claims" or "UI Claims 4-Week Average" to obtain the latest report.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. Data contained here is obtained from what are considered reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed.

(2007-5771)

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