Analyzing the effects of last week's important indicators on ETFs

Part 10
Analyzing the effects of last week's important indicators on ETFs (Part 10 of 10)

Why jobless claims don’t point to any job improvement

Unemployment claims

New unemployment claims are compiled weekly to show the number of individuals who’ve filed for unemployment insurance for the first time. An increasing trend suggests a deteriorating labor market, while a decreasing trend means the labor market is improving. It’s one of most powerful indicators of economic activity, as increasing jobless claims mostly correlate with slowing economic growth.

The higher the jobless claims, the more burden there is on government spending, as the government has to pay unemployment benefits to applicants. On the other hand, fewer jobless applications translate to higher income. Consumer income and household spending power go hand in hand. If income increases, spending moves too, which in turn strengthens the economy.

Weekly Initial Jobless ClaimsEnlarge Graph

According to the Labor Department release on February 27, 2014, initial claims for jobless benefits rose 14,000, to a seasonally adjusted 348,000 in the week ended February 22 from the previous week’s downwardly revised figure of 334,000.

Wage-price spiral

The wage-price spiral is a macroeconomic theory that explains the relationship between rising wages and rising prices, commonly known as “inflation.” When wages rise, they push demand for goods and services, leading to increasing prices. Higher prices mean higher inflation, which also pushes interest rates across the board.

According to the U.S. Department of Commerce Bureau of Economic Analysis, wages and salaries have been rising. However, inflation is still below the 2% benchmark, as per the Fed. This means that although consumer spending power has increased, demand in the market hasn’t. Investors are very still skeptical in terms of spending on account of volatility in the economy. Now, with tapering confirmed by Fed Chair Janet Yellen as per her speech on February 27, 2014, the economy is expected to revive. This should make investor sentiment bounce back and support more spending.

To learn more about ETF metrics, see the Market Realist series Will this week’s releases impact the Fed’s March FOMC meeting?

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