Jobless Claims Hit a 44-Month Low —Don't Toast the Recovery Just Yet

For those of us enthralled by the bizarre stop-start nature of the recovery, this morning's news was like a Christmas gift followed by a slap across the face. The Christmas gift: Initial jobless claims (an important leading indicator for unemployment) fell to their lowest level in more than three years, the latest in the string of good news. The face slap: GDP was revised down to 1.8% in the third quarter of this year and gross domestic income growth, an alternative measure of the economy, was revised down to 0.2%.

In other words, the labor force hit a happy milestone the same day we learned the economy was a rounding error away from being in recession last quarter.

Two charts tell today's story. First, from Zero Hedge, a picture of GDP growth since the fourth quarter of 2010. The colors correspond to components of the economy. Blue is for personal spending; red for investments; green for inventories; purple for exports; light blue for imports; and orange for government spending. In the light red box, we've got the revisions for the third quarter of GDP. Fixed investment made a nice comeback since the first quarter, but personal consumption has slowed way down in the middle of the year.

Now a look at unemployment insurance claims. After ticking up in the first half of 2011, the four-week moving average has consistently fallen to its lowest level since May 2008. That should -- should! -- presage a stronger labor market heading into 2012. But so many people have dropped out of the labor force in the last year that their return could make unemployment bounce up before it begins its final descent.

Signs like falling unemployment claims point to strong fourth-quarter growth, as Annie Lowrey reports in the New York Times...

In recent weeks, a broad range of data -- like reports on new residential construction and small business confidence -- have beaten analysts' expectations. Initial claims for jobless benefits, often an early indicator of where the labor market is headed, have dropped to their lowest level since May 2008. And prominent economics groups say the economy is growing three to four times as quickly as it was early in the year, at an annual pace of about 3.7 percent.

If economists are optimistic, one hopes that sort of confidence could trickle down from the ivy towers and think tank conference rooms into Main Street businesses. But economic forecasts have a crummy record of forecasting reality. The Citigroup Surprise Index, where a rating of zero marks a perfect guess, shows we're wildly over-optimistic about the future as often as we're lugubrious.