Jobless Claims and the Market: Why They Matter

What Are Jobless Claims?

Jobless claims are a statistic reported weekly by the U.S. Department of Labor that counts people filing to receive unemployment insurance benefits. There are two categories of jobless claims: initial, which comprises people filing for the first time, and continuing, which consists of unemployed people who have already been receiving unemployment benefits. Jobless claims are an important leading indicator of the state of the employment situation and the health of the economy.

Understanding Jobless Claims

The nation's jobless claims are an extremely important indicator for macroeconomic analysis. A weekly report produced and published by the Department of Labor (DOL) tracks how many new people filed for unemployment benefits in the previous week. As such, it is a good gauge of the U.S. job market. For instance, when more people file for unemployment benefits, it generally means fewer people have jobs, and vice versa.

Investors can use this report to form an opinion of the country's economic performance. However, it is often very volatile data because it is reported every week. The moving four-week average of jobless claims is often monitored rather than the weekly figure. The report is released Thursday mornings at 8:30 a.m. ET and can be a market-moving event.

During the economic downturn caused by the spread of the COVID-19 virus, weekly jobless claims in the U.S. soared to historic levels as companies reduced their payrolls as business was halted due to social distancing. More than 30 million Americans filed for unemployment from mid-March to April 30, 2020, according to the Federal Reserve Bank of St. Louis. The unemployment rate hit 14.7% in April 2020.

These numbers have since improved. There were 258,000 initial jobless claims filed in the week ending Oct. 5, 2024, and about 1.86 million continuing claims during the week ending Sept. 28, 2024. The unemployment rate was 4.1% as of September 2024.

How Jobless Claims Affect the Market

As mentioned, the initial jobless claims measure emerging unemployment and the continued claims data measure the number of people still claiming unemployment benefits. The continued claims data is released one week later than the initial claims. For this reason, the initial claims usually have a higher impact on the financial markets.

Many financial analysts incorporate estimates of the report into their market forecast. If a weekly release on jobless claims comes insignificantly different than consensus estimates, this can move the markets higher or lower. Generally, the move is the inverse of the report. If initial jobless claims are down, the market will often rally upwards. If the initial jobless claims are up, the market may slump.

The Initial Jobless Claims Report gets a lot of press due to its simplicity and the basic assumption that the healthier the job market, the healthier the economy. That is, more people working means more disposable income in the economy, which leads to higher personal consumption and gross domestic product (GDP).

Why Jobless Claims Matter to Investors

Markets may react strongly to a mid-month jobless claims report, particularly if it shows a difference from the cumulative evidence of other recent indicators. For instance, if other indicators show a weakening economy, a surprise drop in jobless claims could slow down equity sellers and could actually lift stocks.

Sometimes this happens simply because there isn't any other recent data to chew on at the time. A favorable initial jobless claims report may also get lost in the shuffle of a busy news day and hardly be noticed by Wall Street.

Jobless claims are also used as inputs for the creation of models and indicators. For example, average weekly initial jobless claims are one of the 10 components of the Conference Board's Composite Index of Leading Indicators.

The Bottom Line

Jobless claims are the number of people filing weekly to receive unemployment insurance due to not having a job. It is an important leading indicator of the health of the economy. If jobless claims are growing, it signals a weakening economy. Conversely, if jobless claims are decreasing, it signals an improving economy.