Drop in Continuing Unemployment Claims Could Signal Onset of Recovery

By Don Miller
Associate Editor
Money Morning

The economy continued to show signs of recovery from the worst recession in 60 years as the total number of Americans receiving unemployment benefits dropped for the first time since January, the Labor Department reported yesterday (Thursday).

The good news came in spite of a small jump in initial applications for state unemployment insurance, which rose by a more-than-expected 3,000 to 608,000 in the week ended June 13. Analysts polled by Reuters were expecting claims to dip to 600,000 from a previously reported 601,000.

But analysts were largely focused on a trend in continuing claims, which tracks jobless workers who stayed on government benefit rolls.

Those claims plunged by 148,000 to a smaller-than-anticipated 6.69 million in the week ended June 6, the latest week for which data was available. That is the lowest number since May 9, and the largest one-week drop since November 2001, Reuters reported.

And in another sign the labor market may be thawing, the closely watched four-week moving average for new claims, which smoothes out short-term volatility, shrank to 615,750, the least since February 14.

The drop also halts a streak of 21 straight increases in continuing claims, including 19 that were records.

"The labor market remains weak but it's starting to stabilize," Maxwell Clarke, chief U.S. economist at IDEAglobal in New York told Bloomberg News. "An improvement in employment conditions and improvement in confidence go hand in hand with an improvement in consumer spending."

Still others heralded the news as a harbinger of a recovery in the overall economy.

"Overall, we judge this report as another among a growing number of signs [however tentative] that the economy is beginning to stabilize," Nomura Holdings Inc. (NYSE: NMR) economist Zach Pandl, wrote in a research note to investors, The Wall Street Journal reported.

After companies made deep job cuts earlier this year, the drop in claims is a welcome change for weary jobseekers battered by the recession.  Companies have slashed more than 6 million jobs since the recession began in December 2007.

Of course, the statistics don't reveal whether workers on government rolls are successfully finding new jobs or dropping off because their benefits have simply run out after the normal allotment of 26 weeks.

Any drop in continuing jobless claims might be reflecting only the drop in initial claims, as fewer people join the rolls.

"It is unlikely that new hiring has picked up in any meaningful fashion," Joshua Shapiro, chief economist with MFR Inc., a consulting firm, wrote in a note to clients, the Associated Press reported. "More probable is that long-term unemployed are starting to fall off the rolls."

And the likelihood of significant hiring as the economy recovers remains in doubt.

As reported in Money Morning last week, U.S. Federal Reserve Bank Chairman Ben S. Bernanke threw cold water on hope for a full-blown economic rebound when he hinted recently that the U.S. labor market could well be facing a jobless recovery - an upturn in which the economy and corporate profits advance, but virtually no new jobs are created to compensate for years of layoffs.

The bankruptcies of General Motors Corp. (OTC: GMGMQ) and Chrysler LLC are likely to directly throw at least 32,000 more workers out of work in the coming summer months. And countless others at parts supply companies and other auto-related businesses may soon follow.

Nevertheless, a further reduction in continuing claims might be enough for some economists to call the recession over.

Bruce Kasman, chief economist at JPMorgan Chase & Co. (NYSE: JPM), said that a drop in the four-week average to 580,000 by next month would be sufficient to declare the recession over, according to the Associated Press.

Kasman is chairman of the American Bankers Association's economic advisory committee, a group of economists for large banks that this week predicted the economy will recover in the third quarter.

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