Jobless Claims Data May Sound False Alarm for Labor Market
Claims for jobless benefits, normally one of the most timely and closely watched indicators of the state of the U.S. labor market, are losing their cachet, economists at Morgan Stanley and Citigroup Inc. say.
The number of applications for unemployment insurance dropped to 453,000 last week, according to a report today from the Labor Department. The level is much higher than would be the case when the economy is creating as many jobs as it has in the past couple of months, according to economists David Greenlaw and Steven Wieting.
“We have a disconnect here,” Greenlaw, Morgan Stanley’s chief fixed-income economist in New York, said in an interview. “There’s a pretty long list of things pointing in the direction of a gradual improvement in labor demand. Claims are flashing a different signal.”
One reason for the divergence is the “dramatic extension” of benefit payments, which can go on for up to an unprecedented 99 weeks in some states, Greenlaw said. The protracted support provides an incentive to file, even among those who may not be eligible, he said.
Initial claims figures are a tally of applications for benefits rather than approvals, and historically, half the applications are rejected, said Greenlaw.
The rejection rate, which Greenlaw calculated by comparing initial claims to the actual number of people getting their first payment, began to rise in March and April, so the elevated claims may reflect an increase in ineligible filers, rather than more firings, he said.
Adding to the distortion is a disproportionate number of construction workers seeking benefits and maybe even the first wave of temporary census workers, Greenlaw said.
Construction workers currently account for about 13.5 percent of the people receiving benefits, yet only make up about 4.5 percent of payrolls. They tend to have more frequent periods of unemployment as projects start and end.
“This churning could lead to higher levels of initial jobless claims than in periods when the relationship between the economy and the construction industry is more normal,” said Greenlaw.
While the temporary government workers helping to take the decennial population count are probably not eligible to receive benefits, there is a “strong possibility” they will seek payments, said Greenlaw, citing the amount of discussion on the subject on Internet bulletin boards.
“I wouldn’t dismiss the claims data, but I’d certainly use caution in interpreting it,” Greenlaw said.
Reinforcing the recovery in the job market, employment as measured by the Labor Department’s household survey has risen for four consecutive months this year. The Institute for Supply Management’s index of manufacturing employment climbed in May to the highest level since 2004, while the group’s index of service industries jobs jumped to the highest level since 2007.
Planned firings dropped 65 percent in May from a year earlier, according to figures released yesterday by Chicago- based Challenger, Gray & Christmas Inc.
The number of claims over the past four weeks averaged 459,000, a level consistent with outright job losses in past recessions, Wieting, managing director of economic and market analysis at Citigroup Global Markets in New York, wrote today in a note to clients.
Claims “seem out of step with the current state of the labor market,” said Wieting, who agrees the government extension of benefits is distorting the data.
In the past, when benefits lasted 26 weeks, many workers would not file claims right away and those who got jobs wouldn’t file at all, he said. Now, nearly all fired workers are applying for benefits, keeping claims “stubbornly high,” he said. The recent increases in payrolls are more typically seen when claims drop to the high 300,000 range, according to Wieting.
Employment excluding government agencies grew by 483,000 workers in the first four months of the year, according to the Labor Department. Wages and salaries advanced 1.4 percent over the period, the best four-month gain in two years.
“Most other labor gauges suggest that the outlook for employment is improving, and that employment and wage-based income gains are beginning to support recovery,” Wieting said.
Payrolls probably rose by more than 533,000 workers in May, a fifth consecutive gain, according to the median forecast of economists surveyed by Bloomberg News before the Labor Department’s report tomorrow. Of those, 178,000 will reflect private hiring, the survey showed.