The weekly jobless claims data, stating the number of newly unemployed applying for jobless benefits from the government, is released on Thursday of each week by the Department of Labor. It is a piece of high-frequency data, and highly volatile. Depending on the state of economic activity, markets can disregard it, or react to it in a highly agitated fashion. Beyond the immediate reaction, however, the weekly jobless claims data is good for establishing trends, telling us about the direction of the U.S. economy, and about the future health of the global economy as a whole, as employment trends in the U.S. translate to economic activity abroad.
This data is released by all the major financial news providers, and is discussed extensively by major news channels, websites, and newspapers, along with other sources of information. The advantages of this release lie in its timeliness, and its usefulness as an early warning system close to economic inflection points. On the other hand, it is volatile, and highly unreliable as an immediate release, because of its susceptibility to factors such as weather, human error, and many other unexpected events affecting its calculations. It is frequently revised following initial release, and as such, many traders and analysts choose to focus on the four-week moving average in order to smooth out these factors and to reduce volatility.
Although the markets usually focus on the initial and continuing jobless claims numbers, the release often packs a lot more information. We’ll take a look at the various components of this release here, and examine them one by one.
Initial Jobless Claims
This is the headline number released by news media, stating the number of newly unemployed seeking jobless benefits from public institutions. When employers find conditions unsuitable to maintaining the present work force, layoffs ensue, and since it is difficult to find a new job right after being discharged, workers find a temporary source of income from government aid as a substitute for regular wages.
The unemployment benefits program was started by the Roosevelt Administration in 1935, as part of the general efforts aimed at protecting the labor force from bearing the full brunt of the economic downturn which is now remembered as the Great Depression.
Although the initial jobless claims data often receives the greatest attention from market participants, and seemingly leads to the strongest reactions in the bond and stock markets, it’s not as significant as a long-term indicator as the continuing claims data, which is the second most important component of the release in terms of immediate market response. Continued Claims
The continued claims component of the weekly jobless claims release simply states the total number of unemployed workers in the U.S. receiving unemployment benefits from the government. As would be expected, this piece of data is exceptionally important for gauging the health of the labor market, and the economic well-being of the nation. A rising continued claims data signifies increasing tensions in the labor market which will sooner or later translate to greater economic troubles for the country as a whole.
The continuing claims data is much more reliable as an indicator in comparison to the weekly jobless claims component. Trends established over weeks are carefully observed by most market participants as well as the moving average, which is thought to be a good leading indicator of recessions and recoveries.
We have stated before that the weekly jobless claims release is highly volatile and unpredictable in the short term in addition to being revised frequently. A majority of traders, therefore, choose to focus on the four-week MA of the data, instead of the raw number released. This approach is so popular that the Department of Labor itself usually adds the moving average number to its own release, to be readily available to traders.
Changes in the moving average are carefully watched by market participants seeking to establish clarity over the chaotic mess of numbers present in the release.
Insured unemployment rate
The insured unemployment rate is the ratio of unemployed workers on insurance benefits to the total number of workers covered by government programs. It provides an immediate picture of the most recent layoffs in the economy, and compares the number of newly unemployed workers still on jobless benefits to the total number who are employed.
This rate differs from the unemployment rate released in non-farm payrolls data in the way the number of unemployed is calculated. The non-farm payrolls release includes everyone who is actively looking for a job, whether he is on benefit rolls or not. The Deparment of Labor release (the weekly jobless claims report), on the other hand, only includes the workers who are receiving unemployment benefits whether they are looking for new jobs or not. Neither of these reports include workers who are unemployed, not receiving government aid, and have no expectation of finding any jobs in the near term due to the severity of conditions in the economy.
The insured unemployment rate is certainly an important component of the release, but it never receives as much attention as the unemployment rate of the more significant NFP release.
Evaluating the Weekly Jobless Claims Data
Evaluating this piece of data involves two purposes: one is immediate trading profits, the other is the extraction of information which will contribute to better understanding of economic trends and the future of market action. It is possible to interpret the jobless claims data on a short-term basis, mostly as a part of a general news trading strategy, or in the context of the big picture often sought by fundamental analysts. We’ll take a brief look at both approaches in this section.
Depending on how surprising the release is, and also on the time period, and phase that the economy is going through, reaction to this piece of data can be anything from modest, to chaotic. Especially at times of uncertainty the weekly jobless claims data can cause a lot of volatility in the stock, bond, and naturally forex markets. Rising claims usually lead to falling government bond yields, and stock prices, and falling claims are met with higher yields, lower bond prices, and rising stock prices. Since falling jobless claims means that the economy is doing better, and if in a recession, recovering, traders and analysts interpret improvement in the unemployment situation to suggest that the Federal Reserve will raise rates, with the natural chain of thoughts leading to the observed reactions in the market.
It is important to remember, however, that the released data is prone to revisions, and is highly unpredictable. Consequently, short term market reactions can be quickly contradicted by further developments, and may lack basis or long term momentum. Volatility is of course commonplace in financial markets, but the weekly jobless claims data, as a high-frequency release prone to revisions, can be exceptionally misleading for long term trading.
News traders usually refuse to make any move on the basis of this data unless the release is exceptionally surprising and a severe market reaction ensues.
The main value of the weekly jobless claims data is in its role as an early warning indicator of economic recoveries. As it is well-known, the non-farm payrolls data lags economic recoveries by a considerable margin, and is usually prone to deemphasize the size of the recovery in the labor market once a recession has ended. The weekly jobless claims data, on the other hand, is often a leading indicator of recoveries, when they happen. Continuing claims leveling off is thought to be a powerful sign that the momentum of a recession is decelerating, and conversely, a sustained rise in continuing claims over a number of months (as measured by the moving average) is seen as a sign of deteriorating conditions in the economy.
A comparison of the unemployment rate as stated by the non-farm payrolls release, and the insured unemployment rate, as released by the Department of Labor, can also give a good picture on a sizable section of the U.S. consumer. In the absence of savings, workers have to find a way of taking care of their families and themselves, and when the period of insurance runs out, it is possible that many will have to work at jobs that are much below their capability in terms of past education and skills. Such a situation has consequences in terms of social and political stability, and is important for analyzing economic events over the longer term.
The regional breakdown of jobless claims, and their increase or decrease across states can also be helpful in identifying troubled economic sectors or regions.
On a typical week when there are no major releases no important news conferences, geopolitical events, and shocks, the weekly jobless claims data is one of the major generators of market volatility and price trends. Since it is released every week, it provides a timely, if somewhat imprecise snapshot of labor market conditions, and by extensions, of the general health of the American economy. Like the ISM releases eagerly anticipated by impatient traders, the weekly jobless claims release is an important component of the weekly trading schedule.
Unfortunately, due to the frequent revisions it undergoes, the value of a single release, however, shocking, extraordinary, positive or negative it may be, is very limited. Thus, it is never a good idea to revise one’s long-term outlook on the basis of a single unexpected piece of information from this source. On the other hand, a sustained string of bad or good numbers over a month or two, accompanied by improvement in the non-farm payrolls releases can be a sign that something is changing.
It is also important to recall here that the survey for the non-farm payrolls release is conducted during the third week of the month, coinciding with the same weeks weekly-jobless claims release. There are many traders who seek to establish a correlation between these two numbers, but it is better to be skeptical since the relationship is disputable at best, and the logical relationship is far from being explained.
In short, the weekly jobless claims data is an important early indicator if used with a lag of one or two weeks, and based on the information provided by the four-week moving average. It is not a good idea to base decisions or analysis on the raw data, unless one is a short-term news trader, a day trader, or a scalper whose only purpose is exploiting the unpredictable immediate reaction of market participants to the headline release and its obvious implications at first sight.