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The weekly jobless claims report showed better-than-expected numbers on Thursday. However, analysts at Wells Fargo, point out that the marked drop in initial claims was overstated by a change in methodology, and is not a sign the labor market’s recovery is kicking into higher gear. 

Key Quotes: 

“Initial claims for unemployment insurance fell by 130K for the week ending August 29, but the past week’s drop in headline claims comes with an important caveat.”

“With this week’s data, the Department of Labor changed the way it adjusts initial claims for seasonality. Instead of multiplying the unadjusted number by the seasonal factor, which is considered more accurate when the level of a series is generally steady, it has switched to an additive method. Given that the unadjusted level of claims is starkly higher than normal due to the pandemic and not usual seasonal factors, the multiplicative method has tended to overstate the level of claims in recent weeks, since August typically sees a below-average number of claims.”

“The level of new and continuing claims remains elevated, signaling the labor market continues to experience a significant degree of disruption. However, the modest downward trend in claims the past few weeks is one sign that the labor market’s recovery has at least not gone into reverse and that employers continued to add jobs in August. Yet momentum seems to be fading, pointing to a smaller increase than last month’s 1.76M gain.”

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