This is a new feature on Adventure Money that may or may not continue depending on if there’s enough interest. I don’t see much discussion on the economy itself on most personal finance blogs, but I think it’s important for people to have some understanding economic indicators to get a sense of where the economy is headed.

I think this is especially important these days as the US economy finds itself in a rather precarious state. As you may have heard, the US economy has been slowing recently, largely due to the housing sector meltdown. Thus far there has been some indication that the effects of the housing slowdown have spilled over into other sectors of the economy, but nothing is conclusive yet.

Over the next few months we’ll find out of the Fed has pulled off the “soft landing.” Basically what that means is that the Fed slowed the economy enough to contain inflation, but not enough to plunge the economy into recession. Typically, this is very difficult to do and quite frankly the Fed fails more than it succeeds at pulling it off. Think of it as walking a tightrope. Too far to the right, you’re screwed. Too far to the left, ditto.

As it stands right now, signs are inflation pressures have eased and the economy has definitely slowed, but is it done slowing? Or in the “soft landing” parlance: Are we on the ground yet?

Two particular items released in the next two days should help provide further guidance. On Thursday, the Initial Unemployment Claims number will be released for last week. On Friday, the Nonfarm Payrolls data for November is released. For now, though let’s look at the…

Initial Claims

The initial claims number is released every Thursday at 8:30 AM EST by the Department of Labor. The data are a compilation of state unemployment claims filed in the last week. The idea is that these data gives us a hint at status of the labor market. Are claims increasing? That’s bad. Claims decreasing? G-o-o-o-d.

Typically, anything under 400,000 new unemployment claims indicates expansion in the labor market. That’s right, even if hundreds of thousands of people are filing for unemployment, that doesn’t necessarily mean the labor market is hurting. Why? Well, there’s always turnover in the economy regardless of how the things are going. Companies merge or go out of business and people get laid off. At the same time, however, other people are getting new jobs with different companies.

Problems with the Initial Claims data

There several problems with the Initial Claims data that must be understood in order to give the statistics proper weight.

First, weekly unemployment claims are extremely volatile. To account for this, economists typically look at a four-week moving average. This is designed to help smooth out the peaks and valleys and get a better sense of the underlying trend. Below is a chart from Briefing.com, which has an excellent economic indicator calendar by the way.

The blue line represents the four-week moving average. As you can see, it’s a much smoother line than the greenish one, which represents the weekly data. You’ll also notice a huge spike in that weekly number. Last week the weekly number came in at 357,000, much higher than previous readings. Is it the start of a trend? A one-time blip? Well, that’s why Thursday’s number is perhaps more important that usual. Another similar number might indicate a weakening labor market.

Another problem with the unemployment claims number is that it only reports, um, unemployment claims! Unfortunately, many people who are unemployed aren’t eligible to apply for unemployment insurance. So we don’t always get the full picture.

These are but a couple of reasons the initial claims data isn’t one of the “heavyweight” economic indicators. It’s useful to some degree, but usually it’s not as crucial as some other indicators. The four-week moving average is perhaps a bit more telling, but even that isn’t always reliable.

All in all, the initial claims data is still worth watching as it does give at least some insight into the labor market. This week, in particular, it will be watched more closely than usual as it might give some indication if Ben has landed the plane or if we’re still in the air.