On Employment, Curb Your Enthusiasm

 | Dec 21, 2011 | 4:15 PM EST  | Comments
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Initial unemployment claims have been trending down, and last week they dropped a sharp 19,000 to reach 366,000, the lowest level since May 2008. Economists and other analysts believe that when claims move below 375,000 to 400,000 (analysts have different thresholds), that signals a sustained increase in hiring.

Since initial unemployment claims measure layoffs, not hiring intentions, does this actually portend improved economic conditions and a sharp increase in employment? Research from the St. Louis Fed, "Initial Claims and Employment Growth: Are We at the Threshold?," suggests that yes, that 400,000 level is the threshold, and it implies that we might see employment growth. However, according to other data from the Bureau of Labor Statistics that measures hiring intentions, we might want to be a bit more circumspect before we expect robust hiring.

But before we begin, consider the last employment report, which showed a marked drop in the unemployment rate, from 9.0% to 8.6%. As I discussed in my column on the employment report, the drop in the unemployment rate was due to people leaving the labor force and therefore not being counted as unemployed, and those jobs that were added were in low-paying industries. When the next payroll report is released, will we finally see a drop in the unemployment rate that is the result of more people actually being hired?

According to initial unemployment claims, we might see a rise in the net number of people being hired, minus those who quit or are fired or retired. Fewer layoffs mean that even with the same number of people being hired as last month, the net number of people getting new jobs will increase. So we might see improvement in labor market conditions.

But before you get too excited, consider that the number of job openings -- a reflection of companies' desire to hire -- has actually decreased in the most recent Job Openings and Labor Turnover Survey (or JOLTS report). The data are as of the last business day in October, and since hires tend to occur a month or two after a job opening is posted, this is actually the right time to handicap the December jobs report, due on Jan. 7.

In the JOLTS report, we see that there were fewer job openings in most major industry groups than in the prior month, with openings totaling 3.267 million in October vs. 3.377 million in September. (The last employment report showed that there were 120,000 jobs created in November, when the number of job openings increased from 3.129 million to 3.377 million in the corresponding JOLTS report.) And remember, not all job openings get filled.

Still, the drop in new claims for unemployment from four weeks ago (claims are measured on a weekly basis) was 26,000, and continuing claims, in data for the Dec. 3 week, rose 4,000 to 3.603 million, but the four-week average is down 5,000 to 3.666 million which is another recovery best. When the jobless claims are released tomorrow, pay particular attention to whether this drop in claims continues. The week that includes the 12th of the month is the "reference week" for when the employment report survey is conducted. Thus, this week is what matters for how many people are working or not, and a drop in claims this week would be particularly welcome.

Besides the fewer number of job openings in the JOLTS report, consider the Institute for Supply Management report's employment metrics. The ISM Manufacturing report's employment component registered 51.8, down from 53.5, and since 50 is the dividing line between expansion and contraction, the tick down to barely above break-even is hardly inspiring for robust manufacturing employment gains.

But the ISM Non-manufacturing survey is where we really see trouble afoot. Manufacturing encompasses only about 12% of the U.S. economy. The service sector, measured by this report, accounts for the rest of the private economy, and here we see that the employment metric shows contraction, with a print of 48.9, down sharply from 53.3 in the prior month. This is not good news.

And government is likely to shed jobs too. While there are not many leading indicators for government employment metrics, the JOLTS report shows that the number of job openings across all levels of government fell from 374,000 to 360,000. I haven't heard much in the way of good news from state and local governments, so I find it hard to see those entities doing any hiring, and they will likely continue to shed workers.

So, when you net out the smaller number of layoffs with the reduced job openings, what you're left with is a picture that still does not point to robust job growth. I would opine that the reduction in layoffs indicates that there are simply fewer people to lay off. Bottom line: I'm not expecting a strong payroll report, even though initial unemployment claims have dropped by a notable amount and are below the 400,000 mark.

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