Vital Signs: Encouraging News for the Weak Labor Markets

On deck: home prices, consumer confidence, Chicago PMI, ISM manufacturing index, pending home sales, construction spending, car sales, factory orders, and the employment report

By James C. Cooper

The standout among the coming week's crop of economic reports will be the Labor Dept.'s June employment report, which comes out on Thursday instead of Friday, since government offices and the markets will be closed on the day before Independence Day. The markets will be very interested to see if the slowing in the pace of job losses, clearly evident in the May data, continued in June. Economists expect payrolls to fall by 385,000, close to the 345,000 losses registered May. Monthly declines have been progressively smaller in each month this year since January's plunge of 741,000.

There's good reason to believe the path toward labor-market stabilization remains in place. The most important signs of that come from weekly claims for unemployment insurance. New claims tend to peak within a few months, at most, of the end of a recession. That peak already occurred in March, when filings averaged 658,000 per week. Through June 20, the four-week average of claims had fallen to 617,000. Excluding the temporary rise and fall caused by Hurricane Katrina, claims have declined the most in the past three months since 2003. Claims would have to fall below 500,000 per week to signal a stabilization in payrolls, but as recessions end, new filings tend to drop off quickly.

The underlying trend in new claims in recent weeks may be even lower. New filings most likely have been inflated by temporary auto-company shutdowns at Chrysler and GM. Weekly claims could show sizable further declines in July, as auto production is scheduled to ramp up again in the third quarter.

The other encouraging news from unemployment claims is the leveling out of the overall number of people receiving benefits. The volume of continuing claims stood at 6.738 million on June 13, down 97,000 from May 30. The decline is the largest since late-2005. In addition, the jobless rate for all people eligible for benefits also appears to have peaked at 5.1% in late-May. That's important because this rate tends to foreshadow movements in the overall jobless rate.

At the very least, the topping out of the insured unemployment rate implies smaller increases in the overall jobless rate in coming months. The June employment report might show the first sign of that. Economists expect unemployment to rise 0.2 percentage point, to 9.6%, which would be the smallest monthly increase in six months. Indeed, the May employment report showed that much of the increase in the jobless rate in the past two months reflects a rising labor force participation rate. That's a typical late-recession/early-recovery pattern, when job market conditions begin to improve gradually. That brings more people into the labor market seeking work, but the improvement has not yet been sufficient for those new entrants to find jobs.

The May jobs data also showed a near stabilization in the sharp declines in temporary jobs seen in previous months. Temp employment tends to be a leading indicator of overall employment trends, since it is more sensitive to shifts in the business cycle than full-time employment. On balance, all signs suggest the weakness in the labor markets continues to fade, but a turn to actual growth in jobs will depend on the strength of the recovery.

Here's the weekly economic calendar, from Action Economics:

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