Unemployment claims drop unexpectedly

Three years after the onset of the Great Recession, signs are mounting that employers might at last be starting to hire new workers.

The Labor Department reported Thursday that new claims for unemployment benefits unexpectedly dropped below 400,000 last week for the first time since mid-2008, and economists called it a hopeful sign that the jobless rate, stuck near 10% for more than a year, might soon begin to fall.

The weather and the holiday period may have exaggerated the improvement in what can be volatile numbers. And given the disappointing job-growth numbers for November and other economic risks such as the depressed housing market, analysts remained cautious about reading too much into the data.

But the sharp drop in initial jobless claims — considered a signal of future economic trends — was consistent with other reports suggesting a steady if slow healing of the labor market. Surveys by business groups and other recent economic statistics such as retail sales and manufacturing activity, plus the expected stimulus from this month's tax-cut deal, point to a stronger recovery ahead. That bodes well for hiring in the coming months.

"This is certainly a great sign that we end the year with a bang, finally breaking this 400,000 barrier," said John Challenger, chief executive at the outplacement consulting firm Challenger, Gray & Christmas. "It doesn't mean clear sailing from here, but it does mean another notch in the jobs recovery."

The latest numbers, for the week ended Dec. 25, showed 388,000 new filings for unemployment benefits on a seasonally adjusted basis. That's down from 422,000 claimants in the previous week and from more than 500,000 in mid-August.

Most analysts were expecting a decline of just a few thousand from the week before.

"It's encouraging," said Wayne Vroman, a senior fellow at the Urban Institute who specializes in employment issues. He attributed the drop to a pick-up in hiring but also to fewer people qualifying for benefits. To be eligible, workers typically need to have earned a certain amount in the 12 months before unemployment, he said. But the job market has been so weak for so long that many have earned little or nothing at all.

Thursday's report showed that nearly 9 million workers were drawing unemployment checks this month, the majority of whom have been without work for more than six months and are receiving extended benefits from federal funds.

Various private and government reports indicate that layoffs have clearly subsided. But employers generally have not stepped up their hiring, despite many of them making strong profits and sitting on mountains of cash. Over the past 12 months, the economy has added about a million jobs, a pace so slow that it can't even keep pace with new workers entering the job market.

In November employers added a mere 39,000 jobs, which helped push the jobless rate up to 9.8%.

"It doesn't matter that layoffs are going down; just remember the huge glut of people out there," said Harrison Kyle Jones, president of Forty Plus of New York, a job networking and support group for professionals.

Still, Jones says he sees some industries beginning to pick up their hiring, including the banking and insurance sectors. And even the number of people his group is now helping is down about one-fourth from a year ago.

Kate Eckhoff, of Columbus, Ohio, also sees the job market changing for the better. The 27-year-old has been looking for work since she graduated from Ohio State University in August 2009 with a degree in international studies. Recently she has had promising leads with an advertising firm and a global company involved in the auto industry.

"I'm really optimistic about the interviews I'll have next month," she said Thursday.

Ohio's unemployment rate in November was right at the national average of 9.8%, having fallen a full percentage point from a year ago. But such large states as California and Florida that took a bit hit from the housing bust have seen no improvement in joblessness over the last year, and several others, including Nevada and Michigan, are also still grappling with double-digit unemployment.

Thursday's report indicated that fewer layoffs in agriculture reduced California's new jobless claims last week, while a few states, including Illinois, Georgia and Pennsylvania, reported smaller cutbacks in construction and service industries.

Manufacturing has held up well during the recovery, thanks largely to stronger demand from overseas markets and domestic businesses ramping up investments in new equipment, sometimes in lieu of adding new staff.

Many of those businesses have refrained from bringing on more employees, in part because of the fragile financial condition of American households. But consumer spending has accelerated lately. And with stronger-than-expected holiday sales, and the projected boost in consumption from Social Security payroll tax cuts for workers next year, many more employers may finally take the plunge.

"The key question is really the jobs picture and whether this [stronger] spending will jump-start hiring," said Karen Dynan, a senior fellow at the Brookings Institution and a former Federal Reserve economist. "We could see a virtuous cycle … in which spending boosts confidence that leads businesses to hire, which feeds to higher income and more spending and more hiring."

On the other hand, workers likely won't find many opportunities at financially strapped state and local governments and the still-ailing housing market.

Earlier this week, the closely followed Standard & Poor's/Case-Shiller index showed that home prices across the country continued to slide in October. But Thursday's report from the National Assn. of Realtors was more encouraging: It said pending home sales based on signed contracts strengthened in November.

Some economists argue that hiring and the broader economy won't have staying power without a revival in the housing market and homebuilding. But others aren't so sure.

Karl E. Case, professor emeritus of economics at Wellesley College and co-founder of the Case-Shiller index, points out that strong housing starts in excess of 2.5 million a year led the nation out of the last four economic recessions. This time, he said, homebuilding has been running at an annual pace of about 500,000 to 600,000 units for the last 28 months.

Home construction and sales lubricate other sectors of the economy, and rising home prices boost wealth and confidence that translate into more spending.

Case thinks the housing market will "bounce along the rocky bottom for awhile." He worries about the so-called shadow inventory — the millions of homes that are underwater and in delinquent status. And he says forces that led to new household formation aren't as strong as before, as immigration has slowed, more people are doubling up and aging baby boomers are downsizing.

At the same time, he said, interest rates are low and falling prices have made homes much more affordable to many families.

"Sooner or later people are going to jump on that in fear of missing the bottom," he said. "The bottom line: It's hard to predict how the housing market will clear itself up."

don.lee@latimes.com

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