Musical Chairs

Story Highlights:

• The four-week moving unemployment average for new claims marked its fifth straight weekly decline, hitting lows not seen since January.
• Defining unemployment is always an imperfect science, further distorted by seasonal volatility.
•  Tentative signs of an employment recovery are encouraging, but aren't necessary for stock market recovery.

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When the music stops each week, more and more workers are left scrambling for a seat. There simply isn't enough room in today's economic game of musical chairs for everyone, and this predicament isn't going unnoticed.

Thursday, the Labor Department announced new unemployment claims increased by 25,000 this past week to a seasonally adjusted 584,000, slightly above analysts' estimates. However, the four-week moving average, which smoothes the volatility inherent in weekly employment data, marked its fifth straight weekly decline, hitting lows not seen since January.

Unemployment numbers are notoriously distorted, perhaps most noticeably by seasonal drivers. Typically, automakers shutter plants and lay off workers in the summer months as they prepare production on newer models. This year, in the face of bankruptcy for Chrysler and GM, these shutdowns began in the spring and were prolonged or even permanent. Aside from production schedules, the government also relies on assumptions to factor in other seasonal employment impacts: manufacturers, farmers, and lifeguards in the summer and retail clerks during the holidays. Hardly an exact science! Plus, the government has all sorts of classifications defining who is considered unemployed—all which can distort the final numbers.

The recession has thrown unemployment statistics into the spotlight—but the numbers are wonky in good times and bad. (People seem to remember that when unemployment is low but become forgetful when it's high.) It's not surprising—unemployment is one of the more relatable government statistics out there. But investors shouldn't look to this statistic to signal a recovery. As we've mentioned, a job market recovery will lag the economic recovery—and both will be preceded by a stock market recovery. Those thinking a drop in the unemployment rate is necessary for economic growth have it backwards. It's only after economic recovery takes hold and companies begin hiring again that jobs reappear.

Fears unemployment will burden the nascent economic revival—or stall it altogether—are undeniably prevalent. There are even fears of a "jobless" recovery. Many contend the economic upturn will be populated by overqualified individuals settling for less desirable positions with decreased benefits, effectively skewing the unemployment rate further. These notions accompany most economic downturns—and historically haven't held water. In good times or bad, headlines will herald the employment story most likely to sell papers (or draw web surfers since actual papers seem to be nearing extinction).

Tentative signs of an employment recovery are encouraging—but aren't necessary for a market recovery. Unemployment surpassing 10% is still in the cards, yet stocks should continue to move higher as the market prices in a brighter future. Eventually, the music will stop and rather than scrambling, we'll realize there are still empty seats to fill.