Initial jobless claims declined to 366,000 for the week ending February 2, declining by 5,000 from last week’s revised result of 371,000. Just a few weeks ago, claims fell to their lowest levels in five years. While that result increasingly appears to have been an anomaly resulting from ill-timed seasonal adjustments, there have been indications of slow improvement on the employment front in recent months.
A reduction in take home pay at the hand of the expiring payroll tax cut has taken a bite out of household income and put some downward pressure on consumer sentiment and spending. A sustained recovery in jobs or income growth may help to soften the blow, although a sustained slowdown in consumer spending is more likely to have negative repercussions on hiring.
Key economic data have posted mixed results in recent weeks. Negative reports on fourth quarter GDP and productivity and a sharp drop in consumer confidence have been offset by positive trends in housing and a mixed reading on the manufacturing sector and employment conditions. Over time, these factors should converge to a greater degree and provide a clearer picture of the broad trend.
Looking forward, uncertainty surrounding fiscal policy remains a concern. As the debt ceiling debate heats up, investors will be reminded of the volatility that surrounded the standoff in 2011.
Investors have largely shrugged off these concerns since the beginning of the year and have driven stocks higher. The next few months may reveal whether the short term rally is a leading indicator of an upturn in economic conditions, or the result of investors ignoring early warning signals of a more meaningful slowdown.