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Initial Jobless Claim’s ‘New Equilibrium’ Can Benefit Payrolls

May 6th, 2010 Michael McDonough

As tomorrow morning’s employment report approaches I wanted to take a quick look at the relationship between the four week moving average of initial jobless claims and the change in payrolls. As a general rule of thumb significant sustained job growth cannot occur until claims move below 400K. However, in March payrolls grew at 162K, while initial claims 4wk moving average remained well above the break-even point at 448K. Since then the average has increased to 459K, yet the consensus forecast is for job growth in April of 190K, with more upside risk than down.

So what happened, has the long-standing relationship gone kaput? In actuality the relationship between claims and payrolls has been rather dynamic throughout its history. Over the past decade the magic number has been 400K (as can be seen in the chart below), but looking at data from only the 1990’s the break-even point was much closer to 430K. It is possible that in this ‘new economy’ the break-even point for claims has once again begun to shift–in favor of bigger payroll gains. Nomura U.S. economist, Zach Pandl, recently highlighted this possibility in a report to clients titled ‘450 is the new 400’. In it Zach said, “Despite these historical patterns, we believe that, today, a weekly claim level of 450,000 is in fact consistent with positive job growth because of structural changes in the labor market.” He accredits this phenomenon with relatively low separations due to reduced quitting and fewer layoffs, which in turn creates higher levels of net hiring. I tend to see some upside for employment over the short-term; however, I still believe monthly gains ex-census will moderate as the year progresses. The current consensus forecast for the change in private payrolls is +98K for April. 

Unprecendented productivity gains continue to place pressure on hiring, with the prelminary Q1 reading coming in at 3.6%, compared to a consensus forecast of 2.6%.  For more reading on productivity and hiring please see this piece:  ‘U.S. Companies Investing in Technology Faster than Hiring’

Initial Jobless Claims 4wk MA(x-axis) Vs. Change in Payrolls (y-axis) 2000-Present

Source: Department of Labor

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