Green Shoots: Unemployment Gloom?

While everyone seems to be convinced that the recession is now approaching its end, or is at least getting worse less slowly, the data continues to wobble back and forth. So I repeat: look at trends, not single pieces of data. This morning’s release by the Bureau of Labor Statistics [‘BLS’] of last week’s claims for unemployment assistance is a case in point.

“… the message is starting to improve. Just not drastically.”

The headlines all blare that the news is disappointing: new claims – people who are making their first claim for aid – ‘jumped’ by 15,000 to 627,000. The general view amongst analysts had been that the figure would drop to 600,000, so the increase jarred the stock market.

I don’t see why.

This is what I said just two days ago:

“But unemployment continues to pile on the agony: mass layoffs reached a record just last month, so all the talk of improvement is an illusion. The data will get worse throughout the year. The green shoots that some saw in those claims numbers last week are very weak.”

The point being that the mass layoffs data gave us all a big hint that the new claims data may blip up.

How should we react?

By being consistent. Rather than jumping up and down every time a piece of data comes out that seems to contradict our hypothesis that things are getting better we should keep testing our ideas against the longer term trends.

Even with this jump up in claims that four week moving average – the figure I keep an eye on – scarcely moved. It has flattened out somewhat. As long as this average doesn’t snap back upward we can be assured that the worst is behind us. So far it is holding steady.

Also: take a look at the total insured unemployed figures in the same BLS report. The pattern is the same. The weekly figure rose, as we might expect given the new claims number, but the four week moving average fell slightly. This supports the same story: the rate of new job losses seems to be very slightly better than earlier in the year.

All this means is that the rate of decline is leveling off and that we can expect a turn around sometime in the next few quarters. This is deliberately vague since caution is still paramount. The world’s economy is still very fragile and that could become a drag on the US.

The OECD has published a revised economic outlook that is quite encouraging. It has taken the green shoots to heart and now expects the US economy to fall only between 2.75% and 3.0% during 2009 before growing slightly in 2010. that is a significant improvement over the 4.0% decline they forecast back in March. Obviously they are reading the same trends we are and concluding much the same thing: the recession most likely will end this year.

But the damage has been horrendous and will have lasting effects. By the OECD’s measurement the US has permanently lost about 1% from its GDP potential. They measure this loss by looking at things like business investment that was not just postponed but eliminated entirely. Plus they try to estimate the impact on workers: the loss is especially high amongst older workers who are highly unlikely to be able to find new jobs at or above the level of skill required in the jobs they lost. That diminution of skills in older workers represents a permanent loss of capacity in the economy. Indeed some of those older workers may simply drop from the ranks of those looking for work and so shrink the labor pool.

Even so, the permanent damage here is not thought to be as bad as in some other countries: the UK may lose 4% for instance.

Finally I would be remiss if I didn’t mention this morning’s release of the revised GDP figures for the first quarter: the revision has the decline at 5.5% rather than the original 5.7%. There’s not much to comment on in the report since most of the revision simply stems from more complete data gathered over the last month. Obviously a drop of 5.5% is awful, but I fully expect the second quarter to be dramatically better.

That’s the problem with green shoots. Sometimes they’re an illusion, and other times you miss seeing them altogether.

Stick to the moving averages and other trend data: the message is starting to improve.

Just not drastically.