Continuing Claims Fall - Analyst Blog

Initial claims for unemployment insurance rose to 608,000 an increase of 3,000 from an upwardly revised 605,000 last week (was 601,000). However, the four-week moving average, which is a more significant figure given the week-to-week volatility in the initial claims number, fell by 7,000 to 615,750.

The four-week moving average is now nine weeks past its peak of 651,000, a drop of 46,000. This is highly significant, since historically the four-week moving average tops out at or just before the data the NBER eventually cites as the end of a recession. Unfortunately, the recession bars are not in the chart below from http://www.calculatedriskblog.com/, so you will just have to trust me on that.

Significantly, the drop in the four-week average was confirmed this week by a 148,000 drop in continuing claims. This is the first drop in 20 weeks (we thought there was a small drop a few weeks ago, but it was revised away; this drop, however, looks to big to get revised out).

Now there are two reasons why continuing claims can fall. Either people are finding new jobs, or because they have simply exhausted their benefits. Given the length of this recession so far, and the extraordinary number of long-term unemployed this time around, the latter factor is at least partially at work.

However, to the extent it is due to people finding new jobs, that is very good news indeed for the economy. It means more people will have the income needed to service their mortgages, thus helping out banks like Bank of America (BAC) with large residential mortgage exposures. It will also help retailers like Macy’s (M), since if people are out of work they are less likely to go shopping.

On the other hand, the level of new claims is still very high, and is still consistent with further rises in the unemployment rate. We would probably need to see the new claims figure retreat all the way to about 400,000 to indicate that unemployment was going down, and we are a long way from there.

Thus, while this data is good news for the banks and retailers, I still favor the more conservative steady demand type firms like Colgate Palmolive (CL) and Johnson & Johnson (JNJ). Their heavy overseas exposure is also a plus given the weakness in the dollar.