Beware of Jobless Claims Below 300,000

Every week, the Federal government releases a report of how many Americans have filed for first-time unemployment benefits in the prior week.  Typically called the "Jobless Report" or "Claims Report", it is closely watched because, logically, claims going lower is a good thing.  It means that fewer and fewer employers are laying workers off.

More closely watched than the actual number of first time claimants is the 4-week moving average of claims because they tend to bounce around from week to week and, without the averaging, it is too difficult to detect an actual trend; either upward or downward.  This week, the moving average was at 293,000.

The problem with the average being below 300,000 is that, historically and very oddly, this has resulted in a soon-to-be bottoming out of claims which precedes a sharp rise.  What is worse, is that a recession soon followed  Proof of this is shown in the following chart accessed from the Federal Reserve's Economic Database (aka FRED):

Click on chart to zoom in

As you can see, recessions (the shaded vertical areas on the chart) typically end with a peaking of jobless claims. Then, over time, the number slowly falls to some level just below 300,000 before  rising, until again, there is an actual recession.  For example, in September of 1982, the claims signaled the end of that recession at 641,750 filings.  Over the next 7+ years, the average dropped out at 289,750 in January of 1989 with a sharp uptick that resulted in another recession that began in September of 1990. Then jobs claims again peaked in March of 1991; only to bottom out in April of 2000 with 269,750 claims before quickly rising to the beginning of another recession in February of 2001.  Of course, the last "Great Recession" followed a bottoming of claims in February of 2006 with an average of 289,750.

So, there is definitely a very repeatable pattern of claims peaking; then, bottoming out; followed by a  sharper rise and, ultimately a recession. 

How low we will go and how fast we achieve it in this current trek below 300,000 is anyone's guess. But, one this is sure, if history repeats itself, lower claims are not such a good thing.

References:

FRED: 4-Week Moving Average of Initial Claims: http://research.stlouisfed.org/fred2/graph/?id=IC4WSA,

U.S. jobless claims up less than expected, point to firming labor market: http://www.reuters.com/article/2014/09/25/us-economy-jobless-idUSKCN0HK1E420140925