Tuesday, November 9, 2010

A Closer Look At Initial Unemployment Claims

Initial unemployment claims have caused me great concern over the last six months because they have remained at stubbornly high levels. However, this is not the first time we have seen this behavior from initial claims.

Notice in the above graph of initial claims there have been two different types of "recoveries" in initial unemployment claims; fast recoveries that occurred before the early 1990s expansion, and slow recoveries that occurred in the last three expansions. This is one of the primary reasons the last three expansions have been labeled "jobless" recoveries. I explained the reasons for this development of "jobless recoveries" in two posts, located here and here. NDD offered a rebuttal here.

Taking a closer look at the early 1990s expansion, notice the initial unemployment claims remained elevated for about a year and a half after the recession ended.

The same is true for the early 2000s recovery -- initial unemployment claims remained high for about a year and a half after the recession ended.

Notice that with this recovery, we are experiencing the same developments.

In short, it appears that while concerning, initial unemployment claims are behaving much as they have in the last two recoveries. This leads to a question regarding the definition of recovery -- that is, can you have a recovery without a drop in initial unemployment claims below a level of say, 400,000?

It's also very important to consider what the NBER looks at when dating recession, especially regarding employment:

Q: How does the committee weight employment in determining the dates of peaks and troughs?

A. In the 2007-2009 recession, the central indicators–real GDP and real GDI–gave mixed signals about the peak date and a clear signal about the trough date. The peak date at the end of 2007 coincided with the peak in employment. We designated June 2009 as the trough, six months before the trough in employment, which is consistent with earlier trough dates in the NBER business-cycle chronology. In the 2001 recession, we found a clear signal in employment and a mixed one in the various measures of output. Consequently, we picked the peak month based on the clear signal in employment, as well as our consideration of output and other measures. In that cycle, as well, the dating of the trough relied primarily on output measures.

Q: Isn't a recession a period of diminished economic activity?

A: It's more accurate to say that a recession–the way we use the word–is a period of diminishing activity rather than diminished activity. We identify a month when the economy reached a peak of activity and a later month when the economy reached a trough. The time in between is a recession, a period when economic activity is contracting. The following period is an expansion. As of September 2010, when we decided that a trough had occurred in June 2009, the economy was still weak, with lingering high unemployment, but had expanded considerably from its trough 15 months earlier.

Q: How do the movements of unemployment claims inform the Bureau's thinking?

A: A bulge in jobless claims usually forecasts declining employment and rising unemployment, but we do not use the initial claims numbers in determining our chronology, partly because of noise in that data series.

Q: What about the unemployment rate?

A: The unemployment rate lags behind the NBER cycle dates as a general matter–it reaches a low point somewhat later than the peak in activity and usually remains at high levels after activity reaches its trough. For example, in the recovery beginning in March 1991, the unemployment rate continued to rise for 15 months after the trough. The lag was 19 months in 2001 to 2003. In the current recovery, the lag was only 4 months, from the trough in activity in June 2009 to the highest point of the unemployment rate in October 2009. But even in September 2010, the unemployment rate remained at high levels, even though these levels were below the maximum reached in October 2009.