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Labor market conditions just keep on improving

Seasonally adjusted initial claims for unemployment last week were much lower than expected (339K vs. 370K), mainly because on an unadjusted basis, actual claims failed to rise as much as they usually do in the first week of October. Compared to last year at this time, actual claims are down 19%. Layoffs are undeniably declining. Conditions in the labor market just keep on improving.

The number of people receiving unemployment insurance has dropped 20% in the past year. So far this year, 2.26 million people have dropped off the unemployment compensation rolls. We are talking about some serious changes on the margin here. Every week, more and more people have an increased incentive to find and accept a job, even though the pay might be miserable compared to their last job. This isn't pleasant for many, but it is one way that the economy "heals."

And with this ongoing improvement in labor market conditions, equities move higher. The market is rallying not because optimism is rising, but because of the improvement on the margin in the economy. Put another way, the market is up because the economy is not down, and in fact is getting a little better. Slow improvement, but improvement. The market has been braced for deterioration, and instead we get modest improvement. This is enough to push risk assets higher, and Treasury prices lower; 30-yr Treasury yields are up 70 bps since last November.

UPDATE: Reader "Bike" notes correctly that last week's data was missing the results from one large state, and that likely accounts for a good portion of the decline in claims. I missed that fact. I think, however, that the downward trend in claims is most likely still intact.

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