Microeconomic Indicator in FOREX:
Initial Jobless Claims
What is Initial Jobless Claims?
Jobless claims simply refer to social security and financial comfort that the unemployed people claim from their respective government every week.
Perceiving its Working
In any country, there is always a set of people who seem to be unemployed voluntarily or involuntarily due to the reasons known to them. Hence the law provides them from certain kinds of benefits in terms of taxes and reduced goods tariff. Here the individual needs to file for the same to the department as long as he remains unemployed and is entitled to receive the compensation. The department of labour records this data every week and publishes them in the media and newspapers.
Knowing more about this, jobless claims are said to be classified into two categories. Initial and continuing. As mentioned earlier initial jobless claims refer to the one where the person files for the unemployment for the first time and continuing refers to those who have already filed for one or two weeks before and have been receiving the benefits. We conclude that jobless claim is the data which reflects the overall economy and is a subject of great importance. We shall be going more deeply into this and understand how this data plays a major role in a county and how the government tends to react to this data. For example, a growth in the jobless claims directly means an increase in the unemployment rate, which cannot be taken lightly.
Importance of Initial Jobless Claims
Besides the leading economic indicators such as the GDP, inflation and interest rates, Initial Jobless Claims is an equally important measure for determining the health of the economy of a country.
Economists believe that this indicator lags in most of the analysis as there is growth visible in the economy even before the unemployment actually starts to pick up. But the unemployment rate causes some sort of ripple effect in the economy. Its common sense that if a person losses job he will not pay the income and other government taxes as a result that person will instantly cut back on his unnecessary spending due to less disposable income a starts to worry about his future financial security.
This is an issue that many countries are facing right now as they fall into a debt crisis as a consequence of lesser tax revenues collected which eventually will lead them to default. If the country’s financial condition is unstable, then the whole financial system will experience a downfall which in turn causes a bear market scenario in the stock markets.
If the unemployment rate is not getting better month-over-month, the bank will probably consider raising taxes to offset for the loss in income tax revenues. Thus forcing the employed section of the individuals to bear the cost of higher taxes and they experience a loss of disposable income. As pointed out earlier, this is again said to cause a ripple effect, and less money will be spent on durable goods and other miscellaneous expenditure. Due to adverse economic conditions, the corporate, as well, may start to lay-off employees and this leads to more people losing their jobs, and this becomes a vicious circle unless it is changed by the policy makers and finance ministers.
In addition, this situation affects the real estate market as well. Studies have shown that 45% of the mortgages fall into foreclosure (action of reclaiming on a property if the mortgager fails to pay) as a result jobless claims and this percentage is bound to increase leading to bankruptcy rates to rise and home values to fall. The only thing left for the people to do is to hope the job situation will improve soon and everything will be back to its record highs
Reliable sources of information
The initial jobless claims are collected and issued by the Department of Labor of the country’s government. There are some economic magazines and websites which keep track of this data every week and also constantly in touch with the labour commission to maintain the genuineness of the information released. One should be careful enough to compare the data from different sources, so the data released does not vary significantly from each other. Here are a few latest initial jobless claims issued and one can see how the claims have remained or changed over the weeks and what is the action plan taken by the governments.
UNITED STATES: https://tradingeconomics.com/united-states/jobless-claims
GREAT BRITAIN: https://tradingeconomics.com/united-kingdom/claimant-count-change
NEW ZEALAND: https://tradingeconomics.com/new-zealand/unemployed-persons
Why Do Traders care about initial jobless claims?
This number is very critical for traders, as in most of the cases it acts as the predictor of the economy. Traders try to interpret it in a way that they look if there is a rise in the jobless claims, what could potentially mean that the job market is slowing down and recession might be in line to come. On the contrary, if the data shows a growth in the numbers from past few releases and has been steady from then on which indicates that the economy is growing and the government is being able to collect higher taxes. This brings some financial stability and a lot more positive inflow of money in the economy.
Most of the traders estimate in a four-week average, as these many factors affecting the data can be volatile. So if there is a reduction in the volume of people working in the subsequent report, this will be given less weight and may not be taken seriously.
It is also worth mentioning that companies pay a high price for unemployment as well. A jobless claim is a very dangerous situation for any country. Over 70% of the industrial production goes to personal consumption and unemployed workers. The output of those workers is not realized, which reduces the GDP and takes the country in a place where there is fewer financial aid from the central banks and other nations.
If the figure is positive, traders gain more confidence in that economy and greatly increase their investments there as they feel safe in doing so. Now, this gets into the attention of other private equity firms which looking for long term bets and seeing others doing so even they park their extra cash in that economy. This way, more and more people get involved, and the country is back on track which reflects in its stock market gains and sound finances.
Frequency of Release
The Initial Jobless Claims report is released a week-after-week by the Department of Labor release as it is meant by the word ‘initial’. Large Investors and investment banks make their own forecasts looking at the previous data and compare the results. If there is not much difference, this statistically means good health of the economy and financial state. Hence it is very flexible in nature as there are enough knowledge sources and tools which help the traders in forecasting the take the decisions even the actual numbers are out.
The release is mostly on the Thursdays of every week, and the business analysts are always on a watch for this data. This will change their investment decisions and further planning. A more in-depth data can be obtained at the labour commission and investment bank’s websites and publishes.
But a more practical approach would be that investors, particularly retail investors, should be smart enough in analysing the data and coming with own set of report and statistics In this way they do not to take decisions after the release of actual numbers and make decisions well in advance.
To conclude, we can state that there is still an ongoing debate between top investors about the degree to which unemployment rates should influence the stock market. What we say is that it should be more common sense based; keeping it simple. If there are fewer people employed, they will have less disposable income to spend on their needs and investments