By Uric Dufrene, Ph.D.
Sanders Chair in Business
Indiana University Southeast
Yesterday’s jobless claim number provides additional evidence of an improving labor market. Jobless claims dropped to 358,000, the lowest since 2008. The jobless claims series is quite volatile from week to week. So it is not unrealistic to expect next week’s number to increase. However, it should be emphasized that the trend is headed in the right direction, and if we see similar numbers in the next couple of weeks, we can expect another positive employment report for February. Based on some of the data for February, the expectation for February nonfarm payrolls should exceed 200,000.
As the figure below shows, jobless claims under 350,000 are consistent with stronger nonfarm payroll changes. Prior to the recession, for example, jobless claims were consistently under 350,000, and the change in nonfarm payrolls was consistently positive. Nonfarm payrolls then began to plummet as unemployment claims skyrocketed. So the unemployment claims number is certainly pointing in a favorable direction for January’s nonfarm payroll report.
The improving jobs situation will provide a boost for consumer confidence. As the graph below shows, there is a link between a positive change in jobs and consumer confidence. The most recent consumer confidence numbers show that consumer confidence has not moved past levels observed in early 2011, serving as a headwind to consumer spending and domestic demand. As the national jobs picture continues to improve, I expect gains in consumer confidence to follow.
The transmission mechanism for consumer confidence and regional jobs growth can be seen by observing the relationship between durable goods and Louisville Metro employment. Consumers need to be confident before they purchase a major ticket item. As Figure 3 shows, improving consumer confidence results in favorable movements in national durable goods activity. Observe the two lines in Figure 3, and you can see the relationship between consumer confidence and durable goods.
Finally, the connection between Louisville Metro jobs and durable goods is evident with the graph below. As durable goods increase, Louisville Metro payrolls follow (similar graphs would likely exist for Indiana and Kentucky). The explanation is quite simple. Louisville Metro is closely tied to national durable goods through auto manufacturing, auto parts suppliers, appliances, logistics, and all the industries that benefit when those industries are ramping up production.