Good News on Jobless Claims Fades Fast

Posted by Diane Swonk on July 19, 2012

Jobless claims surged by 34,000 back to 386,000, a range we have come to know too well. The unusual timing of auto factory closings was the anomaly that pushed claims so low the week prior, and quickly dissipated. We are now back in the murky waters of the second-quarter stall rate of growth and are expecting claims to retreat again as we move into August and September. A combination of factors have added to the hesitation we are seeing in hiring: a slowdown in growth across much of the developed and developing world, triggered largely by the weakness in Europe, continued financial market weakness related to Europe’s debt crisis and the uncertainty that political leaders on either side of the pond seem to have any idea of what to do.

The good news is that stimulus, particularly across the developing world (most notably China and Brazil), will kick in and should help to raise exports and lift the economy a bit in the second half of the year. This would help to bring unemployment claims down modestly, although I wouldn’t be surprised to see them go higher before they trend back down. Cutbacks at the local level are expected to remain much larger than we previously expected, as state governments have pushed many tough decisions onto the cities.

The bad news is that the fat tail risks associated with Europe and the fiscal cliff are rising. The hesitation and real hedging behavior they cause are going to remain with us well into the start of 2013.

Bottom Line: Bernanke gave an accurate view of an economy muddling through (at best) to Congress; now let’s hope members heed his concerns about the fiscal cliff.

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