Initial claims numbers declined more than expected last week (albeit one shortened by the Christmas holiday) backing up the suggestion by some participants at the December FOMC meeting that the labor market is stabilizing although not at an ideal level as continuing claims (below 1.9 million for the third time in the past four weeks) remain elevated. Expect a higher revision to the initial claims number in next week's report providing a more accurate reading of how stable employment conditions have become.

Initial jobless claims came in much lower than expected, with the level reported in the holiday-shortened week ending December 27 down 16,000 from the revised 215,000 level reported for the prior week (previously 214,000). The December 27 week's level compares to the consensus of 218,000 in the Econoday survey of forecasters. The four-week moving average is up 1,750 to 218,750 in the December 27 week.

Seasonal factors had expected an increase in unadjusted claims of 26,612 (+10.1 percent) from the previous week, but instead there was a smaller 5,333 (2.0 percent) uptick.

Connecticut (+3,618), Michigan (+4,808), Missouri (+2,317), New Jersey (+6,807) and Ohio (+2,137) reported noticeable increases in unadjusted first-time claims, while California (-6,230), Florida (-2,165), and Texas (-8,200) reported significant declines.

Insured unemployment was at 1.866 million in the December 20 week, with the prior week's level revised down to 1.913 million from 1.923 million. Continuing claims are higher by 38,000 vs. the same week a year ago, underlining what continues to be a tepid labor market. The four-week moving average is down 17,750 to 1.874 million, from a downwardly revised 1.891 million in the December 13 week. The insured rate of unemployment remained at 1.2 percent in the December 20 week.

New unemployment claims are compiled weekly to show the number of individuals who filed for unemployment insurance for the first time. An increasing (decreasing) trend suggests a deteriorating (improving) labor market. The four-week moving average of new claims smooths out weekly volatility.

Jobless claims are an easy way to gauge the strength of the job market. The fewer people filing for unemployment benefits, the more have jobs, and that tells investors a great deal about the economy. Nearly every job comes with an income that gives a household spending power. Spending greases the wheels of the economy and keeps it growing, so a stronger job market generates a healthier economy.

There's a downside to it, though. Unemployment claims, and therefore the number of job seekers, can fall to such a low level that businesses have a tough time finding new workers. They might have to pay overtime wages to current staff, use higher wages to lure people from other jobs, and in general spend more on labor costs because of a shortage of workers. This leads to wage inflation, which is bad news for the stock and bond markets. Federal Reserve officials are always on the look-out for inflationary pressures.

By tracking the number of jobless claims, investors can gain a sense of how tight, or how loose, the job market is. If wage inflation looks threatening, it's a good bet that interest rates will rise, bond and stock prices will fall, and the only investors in a good mood will be the ones who tracked jobless claims and adjusted their portfolios to anticipate these events.

Just remember, the lower the number of unemployment claims, the stronger the job market, and vice versa.