Weekly jobless claims expected to drop on new methodology

A revised method for calculating seasonally adjusted weekly unemployment claims is expected to reduce the headline number for initial jobless claims starting Thursday.

The Labor Department announced last week that it was updating its methodology to reduce distortions in the data, and make the weekly report a more meaningful gauge of what’s happening in the jobs market.

Each week, the Labor Department takes the raw, unadjusted number of new unemployment claims, and adjusts them based on a formula to smooth out expected variations that happen throughout the year.

The seasonally adjusted data is typically more useful as a gauge of the labor market’s health because it’s easy to compare from week to week, and does not bounce around because of expected changes in seasonal work.

For example, unemployment in ski resorts rises every spring, so the spike in claims would be multiplied by a smaller factor to bring the numbers in line.

But with unprecedented levels of unemployment caused by the pandemic, the multiplication factors have caused large disparities between the raw, unadjusted totals and the seasonal numbers reported each week.

Economists say that has distorted the data and made it less meaningful. As a result, the Labor Department decided to simply add or subtract the seasonal changes as opposed to using a multiplication factor.

“In times of relative economic stability, the multiplicative option is generally preferred over the additive option,” the department wrote in announcing the change.

“However, in the presence of a large level shift in a time series, multiplicative seasonal adjustment factors can result in systematic over- or under-adjustment of the series; in such cases, additive seasonal adjustment factors are preferred since they tend to more accurately track seasonal fluctuations in the series and have smaller revisions,” it added.

The result is likely to be lower seasonally adjusted data on jobless claims, and a likely end to weekly figures on initial claims north of 1 million.

That unprecedented level of initial claims had never been reached before the pandemic, but has shown up in 22 of the past 23 readings.

The Labor Department will not be revising its previous claims with the new formula, so Thursday’s report is likely to show a significant drop in adjusted claims even though it will be comparing apples and oranges.