This article was originally written by Doug Short. From 2016-2022, it was improved upon and updated by Jill Mislinski. Starting in January 2023, AP Charts pages will be maintained by Jennifer Nash at Advisor Perspectives/VettaFi.
Note: We've updated this commentary to include the latest labor force data in the employment report.
Every week I post an update on new unemployment claims shortly after the BLS report is made available. Our focus is the four-week moving average of this rather volatile indicator. The financial press generally takes a fairly simplistic view of the latest number, and the market often reacts, for a few minutes or a few hours, to the initial estimate, which is always revised the following week.
One of our featured charts in the update shows the four-week moving average from the inception of this series in January 1967.
The chart, above, however, gives a rather distorted view of initial claims. Why? Because it's based on a raw, albeit seasonally adjusted number that doesn't take into account the substantial growth in the civilian labor force since January 1967, as illustrated here:
The civilian labor force in the chart above has more than doubled from 76.5 million in January 1967 to over 166 million today. The curve of the line, which the regression helps us visually quantify, largely reflects the employment demographics of the baby boom generation, those born between 1946 and 1964. In 1967 they were starting to turn 21. The oldest are currently eligible for full retirement benefits. Another factor in the curve is the rising participation of women in the labor force (see this commentary).
For a better understanding of the weekly initial claims data, let's view the numbers as a ratio of the civilian labor force.
The latest ratio of 0.14% means that out of 10,000 workers, 14 made an initial application for unemployment insurance payments in the latest data. The latest ratio of 0.143% to three decimal points is well below its all-time high of 2.997% (April 2020) and just above its all-time low 0.120% (October 2022).
What about continued claims? Here is the ratio to the civilian labor force.
The record low of 0.795% was reached in May 2022 but has been on the rise ever since with the latest ratio at 1.09%. Therefore, approximately 11 persons per 1,000 are receiving continuing unemployment insurance benefits.
Unemployment claims as a recession indicator
A particularly interesting feature of this unemployment claims ratio series is its effectiveness in the past as a leading indicator for recession starts and a virtually dead-on coincident indicator for recession ends. In both of the ratio charts above, we've highlighted the value at the month a recession starts. In every instance, the trough in claims preceded the recession start by a few too many months, but the claims peaks were nearly identical with recession ends. Here is a table showing the actual numbers.
We are currently six months from the initial claims low and seven months from the continued claims low.
The business cycle and recession risk
What does the ratio of unemployment claims tell us about where we are in the business cycle and our current recession risk? At present, the ratio for continued claims has been trending slowly up after its trough in September of 2022. Excluding the 1981 recession, the initial claims trough lead time for a recession has ranged from 5 to 22 months with an average of 12 months. If we include the 1981 recession, the average drops to 11 months. Admittedly, the 2009 great recession is an extreme example, but the initial claims trough preceded its December 2007 onset by a whopping 22 months.
Here's our list of monthly employment updates:
ADP Employment Report
Employment Situation Summary
Labor Market Conditions Index
Long-Term Trends by Age Group
Aging Work Force
Ratio of Part-Time and Full-Time Employment
Workforce Recovery Since Recession
Read more updates by Jen Nash