Labor Market Still Stuck in a Rut

New filings for jobless benefits dropped a bit last week, the Labor Department reported today. But the trend is still stuck in a rut. For most of this year, initial weekly jobless claims on a seasonally adjusted basis have been in a range of roughly 450,000 to 500,000. Last week’s tally of 456,000 is a slight improvement over the previous week’s 459,000, but there’s still no sign in the data that a dramatic decline is imminent for this series.

Why are new claims treading water this year? An insufficient rebound in the labor market. And considering the tepid momentum in private-sector job creation in May, it’s not obvious that a dramatic change for the better is just around the corner. (Click to enlarge)

The optimistic spin is that progress in lowering initial jobless claims sometimes pauses after a recession. After the 2001 downturn, new jobless claims fell to around 400,000 in early 2002, moving sideways for the next several years, and even reversing course by rising for a time in early 2003. Keep in mind too that job growth in the wake of the 2001 recession was unusually weak. After the 1990-91 recession, jobless claims also meandered for a time. But the meandering was brief and the pace of job creation was better. Jobless claims dropped sharply to pre-recession levels in 1992, or roughly 18 months after the recession’s official end, as per the National Bureau of Economic Research.

Let’s assume that the Great Recession ended in June 2009. By that standard, the trend in jobless claims doesn’t look all that disturbing. Meanwhile, despite all the anxiety over the pace of job creation, let’s recognize that the net job growth in nonfarm payrolls has snapped back dramatically. Over the past year or so, the economy has gone from shedding jobs at nearly 800,000 a month at one point to modest gains in recent months. That’s a stellar recovery in a short amount of time, and it was all but anticipated by last year’s sharp drop in jobless claims.

The primary challenge is building on the recovery to date. As we’ve been discussing for some time, the main threat isn’t a double-dip recession. We can’t rule that out, but the bigger problem for now is overcoming the rising odds that the economic recovery remains lukewarm.

One more clue for thinking so arrived in yesterday’s monthly update for the Livingston Survey, the oldest continuous review survey of forecasts from dismal scientists. "Projections for the unemployment rate have been revised downward throughout 2010, but it is still expected to remain above 9% into the middle of 2011," advised the accompanying press release.

Yes, that’s just one more prediction, and it should be viewed with the usual degree of suspicion. Meanwhile, it’s still possible that future labor market news will be considerably brighter. That's not beyond the pale, given the rebound in the labor market from massive losses to modest gains over a 12-month stretch. But for the moment, at least, the jobless claims numbers offer minimal incentive for thinking we’re on the cusp of a job creation renaissance.

"The labor market is not as healthy as it should be at this stage of the recovery," John Herrmann, senior fixed- income strategist at State Street Global Markets, tells Bloomberg BusinessWeek. "Hiring isn’t ramping up and this means there are downside risks to growth, income and consumption."