Jobless Claims: Seasonal Distortion?

Yesterday I profiled the trend for a broad mix of economic and market indicators and reasoned that the case for expecting a new recession was still weak. Today’s weekly update on initial jobless claims supports that view: new claims dropped a hefty 26,000 last week to a seasonally adjusted 350,000 -- a new four-year low. Taken at face value, this looks like extraordinary news. The reality, however, may be far less encouraging. Last week's decline is of questionable relevance because of a rather large seasonal adjustment that’s built into the calculation due to routine July shutdowns of auto plants for retooling.

“You can never take claims at face value because of the July shutdowns,” warns Jonathan Basile, an economist at Credit Suisse. David Sloan, a senior economist at 4Cast Inc., bluntly advised ahead of the release that today’s claims numbers will be “misleading.”

If the seasonal factor is distorting the claims data by more than usual, perhaps we can see a clearer picture in the raw, unadjusted numbers on a year-over-year basis. On that score, the ongoing annual drop is still encouraging, although the pace of decline eased last week vs. the previous week's drop from its year-earlier level. Nonetheless, as you can see from second chart below, new claims are still falling on an annual basis within the range of recent history. That suggests that modest growth in the labor market will roll on for the near term, regardless of what's going on in auto production.

Some analysts disagree and predict that the business cycle is crumbling. But if a new recession is imminent, it’s highly unlikely that jobless claims data would be insensitive to the darkening macro clouds. History tells us the exact opposite, namely: when the economy begins to tip over into a new round of contraction, jobless claims rise sharply and consistently. For the moment, there’s no sign of such darkness on the horizon.

The Big Picture
In fact, there’s minimal sign of cyclical trouble across a broad spectrum of economic and financial market indicators. That's not the same as saying that all's well -- it isn't -- or that there are no serious risks lurking -- there are. But if we're trying to gauge recession risk, it's still reasonable to expect more of the same -- moderate growth.
 
Let’s see how the revisions on claims fare and what other economic reports in the days and weeks ahead reveal. Meantime, one thing is clear: It’s still premature to argue, based on the numbers published so far, that the economy has already slipped into a new recession or is in high danger of tumbling in the immediate future.