Welcome back to another week and another installment of Macro Mondays! If you got up and went to work today, you ought to be quite thrilled about that: each week, thousands of people file for unemployment insurance from their respective states, and some will continue to do so indefinitely, losing skills along the way.
Understanding how weekly jobless claims are measured is extremely important to comprehending the health of the overall economy. To learn more about weekly jobless claims, check out Investopedia's definitions and learn about various economic reports on Bloomberg's Economic Calendar.
What are 'Jobless Claims'?
The number of people who are filing or have filed to receive unemployment insurance benefits, as reported weekly by the U.S. Department of Labor. There are two categories of jobless claims - initial, which comprises people filing for the first time, and continuing, which consists of unemployed people who have been receiving unemployment benefits for a while. Jobless claims are an important leading indicator on the state of the employment situation and the health of the economy. Average weekly initial jobless claims are one of the 10 components of The Conference Board Leading Economic Index.
What's the difference between 'initial' and 'continuing'?
Initial jobless claims, rather than continuing claims, are closely watched by financial market participants, since a sustained increase would indicate rising unemployment and a challenging economic environment. Since initial jobless claims may be volatile from week to week, the four-week moving average of jobless claims is also observed to get a better indication of the underlying trend.
Why do investors need to care about jobless claims?
Jobless claims are an easy way to gauge the strength of the job market. The fewer people filing for unemployment benefits, the more have jobs, and that tells investors a great deal about the economy. Nearly every job comes with an income that gives a household spending power. Spending greases the wheels of the economy and keeps it growing, so a stronger job market generates a healthier economy.
There's a downside to it, though. Unemployment claims, and therefore the number of job seekers, can fall to such a low level that businesses have a tough time finding new workers. They might have to pay overtime wages to current staff, use higher wages to lure people from other jobs, and in general spend more on labor costs because of a shortage of workers. This leads to wage inflation, which is bad news for the stock and bond markets. Federal Reserve officials are always on the look-out for inflationary pressures.
By tracking the number of jobless claims, investors can gain a sense of how tight, or how loose, the job market is. If wage inflation looks threatening, it's a good bet that interest rates will rise, bond and stock prices will fall, and the only investors in a good mood will be the ones who tracked jobless claims and adjusted their portfolios to anticipate these events.
Just remember, the lower the number of unemployment claims, the stronger the job market, and vice versa.
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