U.S. Initial Jobless Claims Drop Sharply

Initial unemployment insurance claims fell 34,000 to 388,000 for the week ending December 25th. The 4-week moving average of initial claims, a better indication of the underlying trend in labor markets, slipped to 414,000 from 426,500 the prior week. Continuing claims (for the week ending December 18th) rose 57,000 to 4,128,000 after falling 96,000 to 4,071,000 the previous week.

This report needs to be viewed with a degree of caution given the significant volatility associated with the seasonal factors surrounding the Christmas holiday period and uncertainty as to whether these declines will be sustained. While the sharp drop in claims in the latest week is encouraging, this report will likely have little influence on expectations for the December payroll employment (the payroll employment survey is conducted during the week containing the 12th day of the month). The trend down in the four-week-moving average of initial claims to 426,000 in the December payroll survey week from 443,500 in November bodes well for private hiring to improve by 130,000 from the 50,000 increase recorded in November. The drop in claims bodes well for improved momentum in labour markets into 2011. Weakness in public-sector hiring persisted in December, providing some offset with an expected 10,000 drop reflecting the weak financial position at the state and local level. In total we expect next Friday's payroll report to show an overall gain in December payrolls of 120,000 (which compares to a 39,000 gain on this basis in November).