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Insured unemployed and initial jobless claims predict unemployment

Brent Nyitray, CFA, MBA

San Francisco Fed unemployment study (Part 2 of 5)

(Continued from Part 1)

The insured unemployment rate

The insured unemployment rate is the number of unemployed people who are eligible for unemployment insurance. These people are the most recently laid-off and therefore have the freshest skills. A drop in the insured unemployment rate is the strongest predictor of a drop in the future unemployment rate. This makes sense, as the first order of business is to bring back the most recently laid-off, and then as that pool of labor drains, to start hiring the longer-term unemployed. Historically, assembly line workers would be laid off with the expectation that the lay-off was temporary, and they would get called back to work once the excess inventory was worked off. While we’ve seen less of this today than we used to, you still see this trend in the use of temporary workers.

The chart above shows the unemployment rate over the long term. You can see how it recovered rather quickly in recessions in the past. This time around, it’s recovering more slowly. The main reason why it’s falling is due to a dropping labor force participation rate. One big change in the insured unemployment rate is the lengthening of unemployment benefits. Prior to the Great Recession, unemployment benefits ran out after 26 weeks. Now they last up to 99 weeks.

The insured unemployment rate had a current correlation coefficient of 0.59 and a momentum indicator of 0.44. It was (unsurprisingly) the strongest indicator of future unemployment and the second-strongest indicator predicting future strength in the labor market. The labor market is a big driver of business for homebuilders like Lennar (LEN), KB Home (KBH), Toll Brothers (TOL), PulteGroup (PHM), and Standard Pacific (SPF).

Initial jobless claims

Initial jobless claims are one of the few labor market indicators released every week. Unemployment is a profound driver of economic growth, and persistent unemployment has been the Achilles’ heel of this recovery. While it seems like the big layoffs are largely finished, firms are still reluctant to add staff aggressively. Initial jobless claims come in second as the best predictor of future unemployment, with a current correlation coefficient of 0.47 and a momentum indicator of 0.43. It’s also one of the indicators predicting future strength in the labor economy. This makes sense when you look at the chart above. Initial jobless claims have been falling at a rapid clip, notwithstanding the recent jump, which was due to the government shutdown and the unwinding of computer problems in California.

Continue to Part 3

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