Initial Unemployment Claims Fall

Highlights include JC Penney Co., Inc. (JCP - Analyst Report), Nordstrom, Inc. (JWN - Snapshot Report), Morton's Restaurant Group, Inc. (MRT - Snapshot Report), McDonald's Corp. (MCD - Analyst Report) and Wal-Mart Stores, Inc. (WMT - Snapshot Report).

Initial claims for unemployment insurance fell sharply this week, to 610k from 663k. Since this is a very volatile series, it is better to look at the 4-week moving average which is at 651k, and improvement of 8,500 from last week.

If claims can hold at this week's level, the 4-week average will come down in a hurry and that will be very good news. If we see the 4-week moving average decline by 35 to 40k from the peak, it will be a very good indication that the recession is coming to an end.

While this week's data is very encouraging, we are still at near record levels for the 4-week moving average of initial claims, and as the graph below shows (larger version available at http://www.calculatedriskblog.com/) in recent recessions it has tended to decline gradually rather than fall precipitously the way it had in earlier economic downturns.



The data on continuing claims was not as good. While the pace of layoffs may be slowing, the pace of hiring is not yet picking up. Continuing claims passed the 6.0 million mark for the first time in history this week to reach 6.022 million, an increase of 172k from last week. In the past two recessions, continuing claims have been even more sticky than initial claims, staying elevated for more than two years after they stop going up.

At this point, the rate of assent in continuing claims has not even slowed appreciably, so it is too early to talk about a plateau, let alone coming down the other side. (For more on the changing nature of unemployment see this earlier blog post).

We are still in an environment where unemployment is going to be rising for the foreseeable future. This will lower incomes and leave people less likely to go out and spend at stores like JC Penney's (JCP - Analyst Report) and Nordstrom's (JWN - Snapshot Report) or eat at restaurants like Morton's (MRT - Snapshot Report). The longer unemployment lasts, the more people are going to have to pull in their belts. It is better to play the "trade down" stocks like McDonald's (MCD - Analyst Report) and Wal-Mart (WMT - Snapshot Report). They can pick up share from the higher-priced competitors to offset the overall decline in demand that higher unemployment causes.

Still, overall this is perhaps the best news that we have seen on the employment front in a long time. If this week's new claims number can be repeated in the next few weeks, we may be close to the end of the downslope of the economy. Keep in mind, though, that reaching the valley floor does not mean you are about to climb up the other side. This valley could be very wide, but at least we are starting to get a picture of just how deep it is.