Why Weekly Jobless Claims Below 400,000 Is So Important

new jobless claims
new jobless claims

In today's economy, still dealing with the aftereffects of the financial crisis and Great Recession, you have to stay especially tuned to subtle, and sometimes obscure, changes that can signal better times are ahead.

One such bit of news last week was that initial jobless claims remained below the 400,000 level for the second consecutive week, falling 20,000 to a seasonally adjusted 368,000 -- the lowest level in almost three years. However, while we often hear economists and business news anchors referring to the "psychologically significant 400,000-level," hardly do they ever bother to explain why the 400,000 level is so important.

So, here's the lowdown:

Most investors know that even during times of strong economic growth, job losses occur. Some companies shed workers because they're not performing as well as competitors, firms merge and require fewer employees, new technologies displace workers, companies transfer jobs overseas and so on. Layoffs occur for dozens of reasons -- and they occur even in the best of times.

Similarly, most investors know that layoffs -- and therefore new jobless claims -- rise during recessions.

The Historical Trends

Since the mid-1970s, when U.S. GDP hit $1.5 trillion -- about $6.7 trillion in 2011 dollars -- it's been hard for weekly new jobless claims to fall below 400,000, and even more rarely to fall below 370,000.

Given the size of the U.S. workforce, if jobless claims stay below 400,000, it suggests that companies are seeing sufficient demand to retain employees, with many likely to add jobs, provided the economy continues to grow.

The two recent U.S. economic expansions provide good examples:

  • During the 2002-2007 expansion, jobless claims fell below 400,000 beginning in late summer 2003, then remained below 370,000 for about four-and-a-half years, from fall 2003 to spring 2008. Jobless claims started rising in December 2007, which we now know marked the start of the Great Recession.

  • During the Roaring '90s, a period of enormous technological innovation, business formation, corporate earnings growth and massive job creation (more than 22 million new jobs), jobless claims basically remained below 350,000 for five years, from spring of 1996 to winter of 2001. During this period, the U.S. unemployment rate fell from 5.6% to 3.9%.

Conversely, sustained rises in jobless claims above 400,000 are viewed as a danger sign that economic growth is slowing, or even worse, falling into a recession. During the 2001-2002 slump, jobless claims flirted with the 400,000-level in mid-2001, then remained at or near that level until the fall 2003.

The Direction Is Clear

And, of course, during the financial crisis-magnified 2007-2009 Great Recession, jobless claims started to rise in the second half of 2007, pushed above 400,000 in the summer 2008, then soared above the truly ghastly 600,000 level during the crisis's acute stage in the winter 2009.

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Since those scary months, progress in lowering jobless claims has been arduous, but the trend is clear: They've fallen from a high above 640,000 to last week's 368,000.

And February's nonfarm payroll report, which indicated that the U.S. economy added 192,000 jobs in the month, up from a revised 152,000 in January and 63,000 in December, provides additional evidence that the job market continues to heal and that the U.S. economy is progressing to a self-sustaining expansion.

Investors -- and job-seekers -- can use those two stats to get a quick read on the U.S. economy's health. If the nation keeps adding 200,000 to 300,000 jobs per month (or more) and if jobless claims remain below that significant 400,000 level, better times are ahead for job-hunters, corporate earnings and the world's largest economy.