The Labor Department's Employment and Training Administration announced today that during the week ending May 18 the number of new claims for state unemployment insurance dropped again. The preceding week's reading was revised down from 352,000 to 351,000, and this week's report knocked off another 7,000, bringing the level down to 344,000.

To smooth out the effects of short-term fluctuations in the weekly numbers, the Labor Department calculates and publishes a four-week moving average of first-time unemployment claims. This is obtained by adding up the weekly values for the past four weeks and dividing by four. For the week ending May 18, the four-week moving average fell from a revised reading of 352,750 to 345,750, the lowest reading since last August.

The four-week moving average of new claims has logged successive new lows for the past several weeks. But, the latest monthly employment situation report showed that from January to April, the overall rate of unemployment fell from 5.8 percent of the work force to 5.4 percent -- close to a ten-year low. This report also showed that only 2000 new nonfarm jobs were created in April. What's more, the percentage of the population that is working is at a ten-year high.

Another related input comes from the Federal Reserve's recent report on capacity utilization. History shows that the unemployment rate and capacity utilization are inversely related. When one goes up the other goes down and vice-versa. For January through April the capacity utilization readings were 82.4, 83.1, 82.5, and 83.0. So, since the first of the year, capacity utilization has been fluctuating in a narrow range and essentially moving sideways.

Taken all together, this data seems to be saying that, for the most part, everyone who wants a job already has one. If this is true, then we should expect the near-term growth in the economy to be somewhat less than what we've recently been experiencing. Businesses can't expand their operations when they can't find anyone to hire.

Perhaps this explains the fall-off in long-term bond rates during the past few weeks and the accompanying rally in the stock market. The bad-news-is-good-news bond market likes a no-growth/slow-growth environment because it keeps a lid on inflation and keeps interest rates down. Stock market participants get bullish if interest rates are declining because, in the past, stocks have usually performed well in a declining interest rate environment.

Byline: Lafferty (MF Merlin)