July 24, 2018
The number of workers filing for unemployment insurance can be a good indicator of the health of the state’s economy and labor market. A consistent rise in unemployment claims over several months suggests the economy is worsening, while falling claims suggest the economy is improving.
Two factors make unemployment claims a useful indicator of the state’s economic health. First, unlike other measures of the economy (such as gross domestic product or personal income), information on the number of unemployment claims is very timely. Claims data is published weekly, typically about two weeks after the claims were filed. In comparison, many other economic indicators are published with a delay of several months or longer.
A second reason unemployment claims are a useful indicator is that they appear to, in many cases, foreshadow future change in other economic variables. For example, unemployment claims tend to begin trending upward several months before a recession begins. The figure below shows monthly unemployment claims in the six months leading up to the last six recessions. In each case, unemployment claims started to trend upward before the recession started. Despite this consistent pattern, unemployment claims are an imperfect predictor of recessions. Although all recent recessions were preceded by an uptick in claims, several short-term upticks in claims have not been followed by a recession. If claims are rising, it does not necessarily mean a recession is around the corner. However, if unemployment claims are steady or falling, this is a good sign that a recession is unlikely in the near term.
Unemployment claims also appear to be a decent indicator of whether incomes will rise or fall in the future. The graph below pairs the annual change in quarterly unemployment claims with growth in quarterly personal income six months later. The data covers the time period 1972 to 2017. As the graph shows, an increase in claims (moving to the right on the chart) tends to be followed by slower income growth six months later (moving down on the chart). Conversely, a reduction in claims is linked with higher income growth. Personal income is the tax base for the state’s largest source of tax revenue: the personal income tax.