Jobless Claims' Drop to 381,000 Another ‘Ray of Light’ for Investors, Job Seekers

What should investors/readers make of the latest drop in initial jobless claims -- a plunge of 23,000 to 381,000 -- the lowest level since February?

Don't over-interpret it. First, investors should keep in mind that it's only one economic report, when several, if not eight or 10 are needed to confirm a strengthening economy.

Second, the more-telling four-week moving average for jobless claims -- which smooths-out anomalies due to holidays, strikes, and weather-related layoffs, etc -- dropped by 3,000 -- a much smaller amount -- to 393,500.

That said, if jobless claims remain below the psychologically-significant 400,000-level -- that would make institutional investors confident that commercial activity is increasing at a pace that prompts most companies to curtail lay-offs and resume hiring -- and it is hiring that forms the foundation for a sustainable economic expansion.

Initial jobless claims have declined about 10 percent over the past year from 425,000 in December 2011.

Cyclical, Structural, Technological Factors All Helping Keep Jobless Claims Higher

What's more, cyclical, structural and technological factors have combined to keep jobless claims higher than they typically would be during the third year of an economic expansion.

First, the cyclical factor: the nation's worst recession, the 2007-2009 Great Recession, since the Great Depression of the 1930s resulted in the most lay-offs since that tragic downturn in the 20^th century.

Second, the structural factor: the U.S. economy continues to experience job loss as a result of globalization -- basically the transfer of jobs to lower-cost production centers outside the United States. Sectors that previously experienced job losses are the t.v./electronics, appliance, automotive, and furniture sectors. The movement of these sectors and others abroad results in an almost continual lay-off announcements, and the trend is likely to continue in the current decade.

Third, the technological factor: improvements in technology are also leading to lay-off announcements, by displacing humans with automation. One classic example is pharmacy prescriptions orders: they used to require a human to physically take the order from the physician over the phone. Now, automated call centers take the prescription information and relay it to the pharmacist.

Economic/Public Policy Analysis: The downtrend in jobless claims is significant and welcome. After a long, long period of above-average claims, the U.S. economic expansion appears to have advanced to the point at which it's going to make a run at the 350,000-level. If claims can drop to 325,000 that would be further confirmation of strengthening demand conditions in the economy.

That said, getting claims to drop to 325,000 will take an increase in both consumer spending and business investment, along with no reduction in demands for U.S. exports in 2012.

As a side note, it's important to point out that current economic policies have lowered initial jobless claims substantially: by 34 percent -- from 586,000 when President Barack Obama took the oath of office in January 2009.

That said, the 388,000-level is still too high: policies -- both public and private -- that increase demand, must continue to keep claims headed lower.