Why The Jobless Claims Report Doesn't Really Matter

By Geoffrey Michael | July 07, 2010 AAA
Why The Jobless Claims Report Doesn't Really Matter

The U. S. Department of Labor creates and publishes the Unemployment Insurance Weekly Claims Report, and adjusts the data for seasonal factors and holidays. The report shows the total number of initial filings for unemployment for each week of the current month, and calculates a four-week moving average. The moving average smoothes fluctuations in the data and allows for trend analysis.

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The narrative portion of the report identifies the states with the highest insured unemployment rates, the largest increases in initial claims and where extended benefits were available. It also lists the states that have experienced increases or decreases of more than 1,000 claims in the week reported, as well as a short narrative explaining substantive changes.

Who Can Make a Claim?
The number of claims is not necessarily representative of the number of people out of work. While most workers are covered by the unemployment insurance system, it doesn't normally cover independent contractors, self-employed individuals and agricultural workers. While the eligibility requirements for state programs vary by state, the following list provides the most common guidelines:

  • Must be available and able to work
  • Must me actively looking for work
  • Must register in person at the unemployment office
  • Must have worked at least a specific number of weeks and earned a minimum salary amount within a specified period of time, prior to submitting a claim

Since the figures exclude several categories of workers and those who don't qualify, the claims report understates the total number of people unemployed in any given week. On a state-by-state basis, it reports the total valid claims submitted for qualifying individuals. It does not report the total unemployment rate, so it is not affected by the assumptions used in the calculation of that rate.

Federal Claims
The claims report distinguishes between claims made in state and federal programs. The initial claims in federal programs differentiate federal employees from newly discharged military veterans. (Preparation can help you land on your feet after getting the "old heave-ho". Don't miss Planning For Unemployment.)

The total claiming federal program benefits are broken down into federal employees, discharged veterans, and the railroad retirement board. It further identifies the total persons receiving extended benefits.

Report Indications
In theory, the weekly unemployment data reflect the health of the job market, which translates into the general health of the economy. Since consumer spending accounts for about 70% of the economy, job growth is key to bolstering economic growth. If people are losing jobs, it not only affects their spending, but those around them who fear they might be next to receive a layoff notice.

The jobs report always gets immediate press coverage because it comes out every week, it's simple, and the average person can relate to it. Most people know someone that has lost their job, and headlines during tough economic times grab attention. Lacking other significant economic news, it's common to see an overreaction to the job data, particularly if it's negative.

Effect on the Markets
The financial markets are news-driven and can be greatly influenced by day-traders and short-term swing traders. In addition, the focus is often on how the report compares to expectations from various sources, rather than the actual statistical data. (Depending on how it's measured, the unemployment rate is open to interpretation. Learn how to find the real rate in The Unemployment Rate: Get Real.)

For investors, the weekly release is a two-edged sword. For example, you may see a report that is better than last week but worse than expected, and the market drops. Or the reverse may happen where the report is worse than last week but better than expected, and the market rises. In these examples, the market reactions were based not on the actual reports, but on how the reports are perceived relative to economic forecasts.

It's not uncommon for the jobs report to be buried by other news, which often results in little or no effect on the markets. The inherent volatility of the weekly data also suggests that other technical indicators and trend analyses may be more appropriate for determining market direction. If there is a consistent change in the moving average of at least 30,000 claims, many economists consider that as a sustainable trend in either direction.

The Bottom Line
The jobless claims should be viewed in the context of other economic indicators, and the trend is far more important than snapshot data points. As a general rule, the report will drive the markets to a greater extent when there are no other economic reports released that day, or when other reports are inconclusive about the direction of the economy.

These factors are important to keep in mind:

  • The advance report is often subject to subsequent revisions
  • Without other key data, the jobless claims statistics are not a reliable indication of economic health
  • There is no breakdown by industry or occupation
  • The raw results are distorted by the seasons, holidays and temporary workers

For the average person with a long-term investment strategy, the weekly jobs data should not be of significant concern. Instead, focus on the trend and how the data are validated by other information such as consumer confidence, unemployment rate, inflation rate, commodity costs, manufacturing data, retail sales, interest rates and GDP.

Catch up on the latest financial news; read Water Cooler Finance: More Spilled Oil, Fewer Jobs.

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