Monday, June 22, 2009

What Decreasing Continuing Claims Mean For The Economy

Could the unexpected decline in continuing claims be evidence that the economy is turning around? Looking back at data from past recessions can uncover patterns that foreshadow the end of a recession. Kathy Lien has found such a pattern that may be good reason for optimism.

We had a number of surprises in U.S. economic data this morning including the Philly Fed index and leading indicators, but the biggest surprise was definitely the decline in continuing claims. Since the beginning of the year, continuing claims, which measures the number of people continuing to claim unemployment benefits rose week after week, forecasting the rapidly rising unemployment rate. Initial jobless claims are important as well, but they can be noisy and volatile.

There are 2 reasons why continuing claims has fallen - 1) people who have been on the unemployment rolls for a long time are falling off because they are no longer eligible for unemployment benefits 2) less companies are firing and more companies are hiring. I think that the latest improvement is a combination of both but regardless, a peak continuing claims always coincides with an end to the recession.

In the following chart, I have highlighted the trend of continuing claims at the end of each U.S. recession over the past 3 decades. As you can see, claims have always stabilized or peaked at the end of the recession. The lag between the end of the recession and the official peak in claims has ranged from 0 to 3 months.

This leads to the question of how the dollar performs after a recession. I did some research into this a month ago and posted my take on (How Does the Dollar Perform after a Recession?):

In the past 30 years, there have been 3 recessions. The most recent lasted from March 2001 to November 2001, a period of 8 months. The one prior to that was in the early 1990s which lasted from July 1990 to March 1991. The current recession has been most commonly compared to the recession in the 1980s, which started in July 1981 and lasted until November 1982, a period of 14 months. We thought it would be interesting to see if there was a consistent trend in dollar after recessions and unfortunately based upon the limited data set of 3 recessions, we have found that the only pattern is the weakness of the dollar against the Japanese Yen 12 months after the recession. When the 2001 recession ended, the dollar traded higher against both the euro and Japanese Yen for the first 3 months but then gave back its gains over the next 8 months. In the 1990s, the dollar traded higher against the euro but lower against the Japanese Yen the first 3 months after the recession ended. The dollar fell further against the Yen but recovered its losses against the euro over the next 8 months. In the 1980s, the dollar fell in the first 3 months after the recession and continued to fall over the next 8 months against the Yen but recovered its losses against the euro.

This post can also be viewed at
Kathy Lien's blog.

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