Thursday Jobless Claims Likely to Justify Fed Rate Cut

by Dennis Jacobe, Chief Economist

Gallup’s hiring measure projects Thursday’s four-week jobless claims will hit new high for year

PRINCETON, NJ -- The Federal Open Market Committee's (FOMC) dramatic cut in interest rates to a target range between 0% and 0.25% reflects the degree of concern it has about the economic outlook and its need to do everything possible to stop the current economic plunge. Gallup's data suggest the FOMC has reason to be concerned as Gallup's hiring measure suggests U.S. employees' perceptions of the job situation at their companies continued to deteriorate during the week ending Dec. 13. The net difference between hiring and firing, now at zero, suggests that Thursday's Labor Department report of seasonally adjusted jobless claims for the week of Dec. 7-13 will likely exceed the 560,000 consensus estimate as the U.S. economy continues to lose jobs at an alarming rate.


Jobs Continuing to Disappear

Last week, the government reported that first-time unemployment claims surged to a 26-year high of 573,000. This was expected because Gallup's Net New Hiring Activity measure (the percentage hiring minus the percentage letting go) had fallen to a new low for the year. Given last week's surge in unemployment claims, it is perhaps not surprising that the economists whose estimates form the basis for the consensus forecast have projected a moderation in jobless claims -- they expect them to drop slightly to 560,000 for the week ending Dec. 13.

While a number of variables make it hard to predict the exact number of new unemployment claims the Labor Department will report on Thursday morning, Gallup figures suggest seasonally adjusted jobless claims are likely to exceed the 560,000 consensus estimate. In addition, the seasonally adjusted four-week average of Gallup's hiring measure suggests seasonally adjusted four-week average jobless claims continued to increase during the week that ended Dec. 13 and likely hit a new high for the year, surpassing last week's four-week average of 540,500.


Jobless Claims Will Push Fiscal Stimulus

Given the numerous announcements of new job layoffs and the obvious sharp decline in overall economic activity, the continuing deterioration in Gallup's hiring measure and the continued surge in jobless claims it implies are not surprising. Still, the new high for the four-week average of first-time unemployment claims projected by Gallup's hiring measure implies that the unemployment rate is likely to surpass 7% when it is next reported in the first week of January 2009.

Obviously, the Fed has said it will continue doing everything it can to promote increased economic activity -- but as today's FOMC decision reflects, it is limited in how much more it can do.

Surging job losses and the inability of the Fed to do much more to help the economy are likely to create significant political pressure for the new Congress to pass a major new fiscal stimulus plan immediately and get this new legislation before President-elect Obama as soon as he is inaugurated on Jan. 20. In fact, the only real limitation on the size of the stimulus plan may be how fast the government can actually find ways to spend new money. As a result, there may be talk of a multiyear stimulus effort when the new Congress convenes.

The likelihood that there will be aggressive government efforts to stimulate the economy early next year provides hope that the current economic decline may bottom out by midyear. In a very real sense, however, the intense political pressures for spending next year create the potential for serious unintended consequences. While a major fiscal stimulus is necessary, it needs to be designed so that it does not "crowd out" the private sector. Real recovery will be achieved only when the private economy begins to reaccelerate.

Survey Methods

Using weekly results for 2008, Gallup's analysis suggests that its hiring measure has a better than 7-in-10 probability of correctly projecting the direction of weekly jobless claims and a better than 8-in-10 probability of predicting the direction of the four-week average of jobless claims. Gallup's hiring measure is based on aggregated interviews with a nationally representative sample of more than 2,000 U.S. workers each week. Gallup asks current full- and part-time employees whether their employers are hiring new people and expanding the size of their workforces, not changing the size of their workforces, or letting people go and reducing the size of their workforces. Gallup's hiring measure is computed by subtracting the "letting go and reducing" percentage from the "hiring and expanding" percentage. The assumption is that employees across the country have a good feel for what's happening in their companies, and that these insider perceptions can yield a meaningful indication of the nation's job situation.

Gallup's Net New Hiring Activity measure was initiated in January 2008. It is an effort to assess U.S. job creation or elimination based on the self-reports of more than 2,000 individual employees aggregated each week about hiring and firing activity at their workplaces. For results based on these samples, the maximum margin of sampling error is ±3 percentage point.

Interviews are conducted with respondents on land-line telephones (for respondents with a land-line telephone) and cellular phones (for respondents who are cell-phone only).

In addition to sampling error, question wording and practical difficulties in conducting surveys can introduce error or bias into the findings of public opinion polls.

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