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What Falling Unemployment Claims Mean for the US Economy

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Average weekly claims and the US economy                   

The Conference Board uses the average weekly unemployment claims as a key constituent of its LEI (Leading Economic Index). An optimal level of employment is one of the key ingredients for a healthy economy, and rising unemployment is a red flag for the economy and could eventually lead to a recession.

The Conference Board thus uses weekly claims data (instead of monthly non-farm payrolls) because weekly claims, when adjusted for seasonality, can provide a more accurate account of the underlying economic conditions. The average weekly unemployment claims carry a weight of 3% in the LEI.

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January average weekly claims at a 3-month low

Weekly unemployment claims in the month of January dropped lower, with the average unemployment claims for January being reported at 234.7 thousand. This is a second-best reading in the past seven months.

Job growth was widespread across sectors in January. According to the January ADP employment report, job growth was negative only in the information sector (VGT), leaving all other sectors with positive job gains.

In January, trade, transportation, and mining (XME) added 51,000 jobs, while leisure and hospitality (PEJ) added 46,000 jobs. The most encouraging factor about the jobs market was the gain in manufacturing and construction (TOL) sector jobs—the two sectors that provide the most employment.

Implication for markets

Surprises in the employment data increase the volatility (VXX) in financial markets. The recent market turmoil at the beginning of February was triggered by the increase in employment and average hourly earnings.

Lower levels of unemployment and rising inflation could force the US Fed to increase interest rates faster than expected. Rapid rising interest rates could mean trouble for bond (BND) markets, which could trigger another global market sell-off like the one we’ve seen recently.

In the next part of this series, we’ll discuss the rebound in new orders for the manufacturing sector.

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