CHART OF THE DAY: Why The Unemployment Rate Is Going A LOT Lower

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Today’s strong initial claims number was the second best since the financial crisis, and a nice confirmation that last week’s Non-Farm Payrolls report was no fluke.

And the good news is that the unemployment rate — which is down to 8.3 per cent — is probably going a lot lower.

This chart, which we first saw published at The Bonddad Blog, looks at the historical relationship between initial claims and unemployment.

The key tweak is that the red line — initial claims — is “detrended,” meaning it’s divided by the population rate, so that it adjusts for the expanding population (you’d surmise that as the population grew, that initial claims would also generally drift higher for reasons that have nothing to do with the economy).

When you present the two in this way, you can see there’s a fairly tight relationship, and you can also see that based on this historical pattern, the unemployment rate should come down.

chart of the day, unemployment rate and initial jobless claims, feb 9 2012

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