The U.S. job market showed further signs of improvement with unemployment claims dropping to 281,000 for the week ended July 11th. The number reflected a decrease of 15,000 from the previous week’s 296,600 claims. (Source: U.S. Department of Labor, July 16, 2015.)
Less than 300,000 people were let go during each of the last 19 weeks, a feat last achieved in 2000. Labor conditions in the U.S. continue to ease at a slow pace, but some improvement is better than none at all. Lower unemployment claims mean less people are getting fired from their jobs. The economic recovery is fully taking root. (Source: Bloomberg, July 16, 2015.)
Plus, the data tells us three important things about the economy.
The unemployment claims report was released on Thursday July 16th, the second day of Janet Yellen’s testimony before Congress. Markets are watching closely as the Chairwoman of the Federal Reserve answers questions from members of the House Financial Services Committee.
One day earlier, Dr. Yellen reiterated her confidence that rates should rise in 2015, presuming the economy evolves as expected. This week’s unemployment claims report is just one data point the Fed will be looking at, but it certainly adds to their narrative.
As the unemployment rate fell over the last few years, many critics argued the decline was caused by people leaving the workforce. Fewer firings will lend credibility to the Fed’s picture of an improving economy. The unemployment rate currently stands at 5.3%. (Source: U.S. Bureau of Labor Statistics, July 16, 2015.)
In April, firings hit 262,000, their lowest level since 2000. After setting that record, the number drifted back upwards until the shift in today’s report. Unemployment claims are a leading indicator of the labor market as they give us a window into the future.
There is clearly an upward trend at the start of the year, followed by a sharp turn in February. The incredibly harsh winter experienced by much of the United States is probably to blame. The onslaught of snow and cold delayed home builders from breaking ground and kept shopping malls empty. (Source: Bloomberg, April 30, 2015.)
At first, economists expected growth would be a lackluster 0.2%, but the seasonal effects caused a downward revision to -0.2%. The economy actually contracted, so it’s not surprising that people were getting laid off. (Source: U.S. Bureau of Economic Analysis, June 24, 2015.)
Once the seasonal effects wore off, a resurgence of demand allowed employers to ramp up hiring and stop letting workers go.
June, the Anomaly
The drop in unemployment claims will reassure markets that June was an outlier in the data. After all, employers react to economic conditions and June was a particularly tumultuous month.
First off, there was the entire Greece debt crisis. Through several weeks of tough negotiations, Greece and its creditors battled over how the country could get to a point of fiscal sustainability.
A deal was reached eventually, but not before Greece defaulted on its debt obligations to the International Monetary Fund (IMF). Markets had begun to price in the possibility of Greece’s exit from the eurozone and that uncertainty could have impacted business confidence in the U.S.
On top of the Greece problem was China’s stock market crash. The Shanghai Composite Index lost over a third of its value in June, before rebalancing in early July. Chinese regulators took extreme measures to put a floor on the market, including jailing short-sellers and suspending trading on over half of the stock exchange. (Source: Profit Confidential, July 9, 2015.)
Both Greece and China have resolved their issues, making me bullish on the U.S. labor market.