How Well Do Initial Claims Forecast Employment Growth Over the Business Cycle and Over Time?

As many of you know we follow the weekly initial jobless claims number as a leading indicator that could point to strength or weakness not in the jobs market but the economy as a whole.  FRED a.k.a The Federal Bank of St. Louis came out with a short report trying to answer the question do initial jobless claim forecast employment growth over the business cycle and over time? The answer simply put is they don't know.


The report indicated that finding suggests that initial claims may now be more useful for forecasting employment growth during periods of increasing economic activity rather than exclusively during periods of declining economic activity.  The reason?  Something that we just talked about here [Initial Jobless Claims & The Long-Term Unemployed] which is the impact that long-term unemployment has had structurally on the economy.


The report went on to state, the slow recoveries of employment following the three most recent recessions suggest that structural changes have occurred in labor markets or the economy more broadly that have altered the speed with which employment recovers following recessions. Conceivably, then, if weak employment growth following recessions is the new normal, then the usefulness of initial claims for forecasting changes in employment may have also changed.


So what does this mean?  It means don't expect job growth to bounce back as quickly after a recession and even during a recovery job growth will be slower than previous recoveries.  It's a trend that Lakshman Achuthan of the ECRI points out in his analysis in which he concludes there has been slower trend growth with each of the last three recoveries and an increase in cyclical volatility.  More on this topic in this piece The Yo-Yo-Years.

We will continue to follow and monitor the initial jobless claims because we believe they still add value as a leading indicator to predicting a downturn in the economy.