by Lee Adler, Wall Street Examiner
Today’s initial jobless claims release is another piece of evidence that Friday’s jobs data should beat the consensus giving the Fed an excuse to announce The Taper on September 18.
Initial claims for unemployment compensation declined at an annual rate of 12.7% last week, which was faster than the previous week’s 10.9% rate and the strongest in the past 4 weeks. It was also significantly better than the average year to year gain of 7.9% for each week over the past two years.
The Labor Department reported that in the week ending August 31, the advance figure for seasonally adjusted initial claims was 323,000, a decrease of 9,000 from the previous week’s revised figure of 332,000. The 4-week moving average was 328,500, a decrease of 3,000 from the previous week’s revised average of 331,500 (was 331,000).
The consensus estimate of economists of 333,000 for the SA headline number was too pessimistic. That, and other data suggest that their nonfarm payrolls estimate of a gain of 177,000 may be too low. (see footnote 1)
Editor's note: The nonfarm payrolls actually came in at 169,000. This can be said to weaken the case for taper, although the difference between 177,000 and 169,000 is far from statistically significant.
The headline seasonally adjusted data is the only data the media reports but the Department of Labor (DOL) also reports the actual data, not seasonally adjusted (NSA). The DOL said in the current press release,
“The advance number of actual initial claims under state programs, unadjusted, totaled 268,843 in the week ending August 31, a decrease of 9,781 from the previous week. There were 309,537 initial claims in the comparable week in 2012.” [Added emphasis mine] (see footnote 2)
The advance weekly report on first time claims is usually revised up by from 1,000 to 4,000 in the following week when all interstate claims have been counted. Last week’s advance number was approximately 1,300 shy of the final number for that week posted today. For purposes of this analysis, I adjusted this week’s reported number up by 1,500 to 270,000 after rounding. It won’t matter that it’s a thousand or two either way in the final count next week. The differences are essentially rounding errors, invisible on the chart.
The actual filings last week represented a decrease of 12.7% versus the corresponding week last year. The prior week was down 10.9% year to year. There’s usually significant volatility in this number but over the past 6 weeks the rate of decline was right around 10-11%. The average weekly year to year improvement of the past 2 years is -7.9%, with a range from near zero to -20%.
The current weekly change in the NSA initial claims number is a drop of 8,000 from the previous week after adjustment and rounding. That compares with a drop of only 3,000 for the comparable week last year and an average change of near zero for the comparable week over the prior 10 years. By any measure, this report showed strength.
Initial claims as a percent of total employed have recently declined to levels last seen during the housing bubble. The current reading is the lowest since just before the economy collapsed in 2007-08.
To signal a weakening economy, current weekly claims would need to be greater than the comparable week last year. That hasn’t happened. The trend has been one of steady improvement. The fact that the latest week was down 12.7% from last year is impressive given that these comparisons are now much tougher than in the early years of the 2009-13 rebound. The data suggests that the economy is still on the same track it has been on since 2010.
Real time federal withholding tax data (which I update weekly in the Treasury Report) showed some weakening in employment in July with a break of the trend of improvement that had been under way all year. But withholding has returned to trend August, with a strong uptick throughout the month.
Cliff-Note: Neither stopping nor starting rounds of QE seems to have had an impact on claims. Nor did the fecal cliff secastration. The US economy is so big that it develops a momentum of its own that policy tweaks do not impact. Policy makers and traders like to think that policy matters to the economy. The evidence suggests otherwise.
Monetary policy measures may have little impact on the economy, but they do matter to financial market performance. In some respects they’re all that matters. We must separate economic performance from market performance. The economy does not drive markets. Liquidity drives markets, and central banks control the flow of liquidity most of the time. The issue is what drives central bankers.
Some economic series correlate with stock prices well. Others don’t. I give little weight to economic indicators when analyzing the trend of stock prices, but economic indicators can tell us something about market context, in particular, likely central banker behavior. The economic data helps us to guess whether the Fed will continue printing or not. The printing is what drives the madness. The economic data helps to predict the central banker Pavlovian Response which is, when the bell rings —> PRINT! Weaker economic data is the bell.
Stocks remain extended and vulnerable relative to the trends indicated by unemployment claims even after the recent pullback. QE has pushed stock prices higher but has done nothing to stimulate jobs growth. The rate of change in claims hasn’t changed since 2011 whether the QE spigot was turned on or turned off.
Given the strength in this data this week, the Fed won’t hear any bells. It still has an excuse to begin tapering QE at the upcoming FOMC meeting September 17-18.
I plot the claims trend on an inverse scale on the chart below with stock prices on a normal scale. The acceleration of stock prices in the first half of 2013 suggested that bubble dynamics were at work in the equities market, thanks to the Fed’s money printing. Those dynamics may have ended in July. Tapering by the Fed would not make the environment for stocks any friendlier. I address the specific potential outcomes in my proprietary technical work.
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Footnote 1: Economists adjust their forecasts based on the previous week’s number, leading to them frequently getting whipsawed. Reporters frame it as the economy missing or beating the estimates, but it’s really the economic forecasters who are missing. The economy is what it is.
The market’s focus on whether the forecasters have made a good guess or not is nuts. Aside from the fact that economic forecasting is a combination of idolatrous religion and prostitution, the seasonally adjusted number, being made-up, is virtually impossible to consistently guess (see endnote). Even the actual numbers can’t be guessed to the degree of accuracy that the headline writers would have you believe is possible.
Footnote 2: There is no way to know whether the SA number is misleading or a reasonably accurate representation of the trend unless we are also looking at charts of the actual data. And if we look at the actual data using the tools of technical analysis to view the trend, then there’s no reason to be looking at a bunch of made up crap, which is what the seasonally adjusted data is. Seasonal adjustment just confuses the issue.
Seasonally adjusted numbers are fictional and are not finalized until 5 years after the fact. There are annual revisions that attempt to accurately reflect what actually happened this week. The weekly numbers are essentially worthless for comparative analytical purposes because they are so noisy. Seasonally adjusted noise is still noise. It’s just smoother. So economists are fishing in the dark for a fictitious number that is all but impossible to guess. But when they are persistently wrong in one direction, it shows that their models have a bias. Since the third quarter of 2012, with a few exceptions it has appeared that a pessimism bias was built in to their estimates.
To avoid the confusion inherent in the fictitious SA data, I work with only the actual, not seasonally adjusted (NSA) data. It is a simple matter to extract the trend from the actual data and compare the latest week’s actual performance to the trend, to last year, and to the average performance for the week over the prior 10 years. It’s easy to see graphically whether the trend is accelerating, decelerating, or about the same.
The advance number for the most recent week is normally a little short of the final number the week after the advance report, because the advance number does not include all interstate claims. The revisions are minor and consistent however, so it is easy to adjust for them. Unlike the SA data, after the second week, they are never subsequently revised.
The Labor Department, using the usual statistical hocus pocus, applies a seasonal adjustment factor to the actual data to derive the seasonally adjusted estimate. That factor varies widely for this week from year to year. The factor applied this week was at the low end of the historical range.