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Market Adjusts to Weakening Labor Picture

We could get close to a psychological bottom as bad news comes to be expected.

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Jobless claims increased 15,000 to 444,000 in the week ended Aug. 30. That follows three weeks of decreases from the peak of 457,000 set four weeks ago, when claims reached their highest since March 2002.

Continuing claims increased 6,000 to 4.435 million. That is the highest level since March 1993. Although some of the recent increase in claims reflects technical factors, the increase almost certainly reflects deterioration in the labor market.

This deterioration will likely be evident in upcoming employment news. Today's jump in claims will weaken the resolve of those who have said the recent jump in claims was largely the result of technical factors.

The technical factor I note is the recently authorized extended benefits program. It is possible, according to the Department of Labor, that many people only recently realized that they were eligible for both extended unemployment benefits, which was approved by the Congress, and regular jobless benefits (because these workers regained eligibility after returning to work).

These filers are now showing up in the initial claims figures. There may also be bad accounting for the extended unemployment benefits, with some states reporting the extended filers incorrectly.

There is debate about the extent and impact of these factors, and the Department of Labor has not quantified the impact except to say that today's data reflect waning influence from the extended benefits program.

Some observers put the impact as high as 70,000, although it is probably a stretch to think that all of the recent increase in jobless claims is because of a technical glitch, especially since claims were trending up before the recent increase.

Through it all, jobless claims therefore appear to be continuing to trend upward and have moved decisively above the dividing line between recession and contraction in the U.S. economy. That figure is assumed to be around 370,000.

From March until the end of June, claims averaged precisely 370,000, suggesting the economy was treading water. That's has been the case when the impact of the recent tax rebates are excluded from the equation.

The recent subsequent spike suggests that the U.S. economy has entered a dark period, which is likely to be marked by increased joblessness. Many are expecting the U.S. economy to contract in the fourth quarter, possibly by a large amount, and the claims figures increase those odds.

The claims figure will help investors come to terms with the idea that bad news is on the way, and after a few more plunges in the monthly payroll statistic, investors could become numb to the notion of much weaker economic activity.

In past recessions. investors eventually ignored bad employment data. They simply became numb to the data and plentiful evidence of impending doom. This means that the bottoming process is closer than before, because in the weeks and months to come, we will be able to more confidently say that much worse economic conditions are already factored into the financial markets.

Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic,

The Money Market

, first published in 1978 by Marcia Stigum, and

The Strategic Bond Investor

. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback;

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