What the Unemployment Numbers Tell Us About the Economy

Editor's Note: Economist Mark Thoma is guest-blogging for The Macro View this week.
The weekly report on new claims for unemployment benefits was released yesterday, and it showed that claims fell by 21,000 to 530,000. This continues a series of small improvements in recent weeks, but today's number is still higher than the 400,000 number (approximately) that is consistent with stable employment. Thus, it appears that employment is still falling.

This validates other labor market indicators, and reinforces the concern that the recovery for labor will be much slower than the recovery for output, something that also occurred in the last two recessions in the U.S.

One further note on the employment statistics: The natural rate of employment is the normal or average rate of employment in the economy; it's the full employment, non-inflationary level of employment. An unknown in analyzing labor market conditions is whether this natural rate of employment will return to its pre-recession levels once the economy has recovered, or whether the "new normal" is an economy where the natural rate of employment is lower than before.

The 400,000 number used above assumes that employment will return to its pre-recession levels, but if structural changes in the economy result in a lower normal level of employment, something many economists believe is a real possibility, then labor markets are even further off than indicated above. Personally, I believe that normal employment post-recession (i.e., after resources have moved out of housing, auto production, and finance and found new homes in other industries) won't be far away from where it was pre-recession, but during the transition period, the rate of employment will be lower than pre-recession levels.

In addition to the employment numbers, data on existing home sales were also released yesterday, and they showed an unexpected drop of 2.7 percent. These numbers can be variable, so it's not clear if this signals a change from the recent upward trend in these markets; hopefully we'll know more today when data on new home sales are released. But these initial numbers do raise questions about the strength of the recovery.