Is the Credit Crunch Weighing on Jobs?

Despite an uptick in the Oct. 18 initial jobless claims report, signs still suggest a tighter labor market than many would expect

Are ill winds from the credit crunch starting to gust through the U.S. labor market? A bounce in the government's weekly initial jobless claims report released Oct. 18, covering the number of Americans filing for first-time unemployment benefits, may have aggravated credit-market worries on Wall Street.

Investors already have been spooked this week by news of big earnings shortfalls at banks such as Citigroup (C) and Bank of America (BAC), the creation of the M-LEC superfund to prop up the commercial paper market, and a Beige Book report from the Federal Reserve that seemed to dwell on downside credit-related risks to the economy. But it would be premature to suggest that this week's increase in claims signals significant weakness ahead for the U.S. jobs picture.

Built-in Volatility

First, let's look at the report. Initial claims surged 28,000 to 337,000 for the week ended Oct. 13, far above economists' median forecast of 312,000. (The week also included the Columbus Day holiday, which often adds volatility to the report.) Continuing claims rose 19,000 to 2,534,000 for the week ended Oct. 6, though the rise still leaves a general downtrend in these figures intact from the recent 2,597,000 peak at the start of September.

The latest report's bounce in initial claims reversed the puzzling claims undershoot in the prior week, resulting in a 324,000 average reading thus far in October. The weekly reading touches the top of the 324,000-to-337,000 range of August. But the October average is still only modestly above the lean 301,000-to-320,000 range of September, and the upward drift in claims over the past two months remains within the normal range of variation for this figure.

Indeed, the heightened range in August would have been seen as an offset to the lean 303,000-to-309,000 range of July (which typically reflects the effects of retooling in the auto industry) had the market not been sifting through the reports in search of credit-market effects. The pops in claims in August and now in this most recent week likely reflect mortgage industry layoffs. But the swings would have been taken as normal monthly volatility and holiday effects had credit-market turmoil not occurred and we were not seeking to prove the hypothesis that the economy is slowing.

Impact on the BLS Report

The latest initial claims data may get some extra attention from Wall Street for another reason: The report coincides with the Bureau of Labor Statistics' survey week for the October employment report, when it compiles the data for the monthly release, slated for Nov. 2. Could the uptick in claims during the survey week signal a soft jobs report for October?

We don't think it will have a significant impact. Our October nonfarm payroll estimate still calls for the U.S. economy to add 100,000 jobs in October, following the 110,000 bounce in September and the 89,000 gain in August, with the assumption of a lingering drain on private employment growth from credit-market disruptions. The recent downtrend in continuing claims should reduce upward pressure on the unemployment rate, which should remain at 4.7% in October.

So far, the lean levels of claims run in sharp contrast to the market's lingering recession fears. Despite the pop seen in the most recent week, the claims data suggest tighter labor-market conditions than most economists would expect given the credit-market turmoil of August.

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