Initital Claims for Unemployment Fell Last Week. Why Should We Care?

Last Updated Dec 16, 2010 2:03 PM EST

Initial claims for unemployment insurance fell last week:
In the week ending Dec. 11, the advance figure for seasonally adjusted initial claims was 420,000, a decrease of 3,000 from the previous week's revised figure of 423,000. The 4-week moving average was 422,750, a decrease of 5,250 from the previous week's revised average of 428,000.
This continues the recent downward trend (the blue line is initial claims, and the red line is the four week moving average):


Why should we care about initial claims? Many analysts use a figure of 400,000 as the breakeven point for job creation. When claims fall below this value, and they are getting close to doing so, employment begins expanding rather than contracting.

The 400,000 figure is a very rough estimate of the turning point, but the relationship between initial claims and actual employment is evident in this graph from the Cleveland Fed (the dashed line marks the 400,000 initial claims figure, note also that the graph has the axes reversed, the left-hand scale is employment growth and the right-hand scale is initial claims):


There is a strong relationship between initial claims for unemployment and changes in non-farm payroll employment, and, consistent with the idea that initial claims are near the turning point for job creation, changes in payroll employment have been hovering around zero and are presently slightly positive.

Although we aren't seeing strong job creation yet, something that will be needed to reabsorb the millions of unemployed workers that are currently searching for jobs, it appears we have finally stopped losing jobs and we are moving in the right direction. Let's hope this trend continues.

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