Initial Unemployment Claims: Mainstream Reports are False and Absurd

by Lee Adler, The Wall Street Examiner

The reporting of first time claims today was absolutely absurd. Media reports shouted that claims had reached a new low. The only problem was that the report was categorically false. The huge drop in claims to a reported 350,000 for the week ended July 7 was purely a result of an arbitrary seasonal adjustment (SA) factor. The reported number of a drop of 26,000 claims to 350,000 was just dead wrong.

The simple proof lay in the fact that on a year to year basis, actual counted claims, that is, not seasonally adjusted (NSA), were down by about 30,000 year to year. The SA number was down 60,000. There is no seasonality difference in comparing the same week year to year. Yet here we have a difference of 100%. The SA year to year change was double the actual change. As a percentage of total claims the difference was roughly 7%. To have been correct, the difference would have been zero.

In my book, that’s just inexcusable. The media must stop the nonsense of reporting only the SA data, and worse, reporting it as if it were fact. The simple truth can be easily discerned by a basic examination of the not manipulated, actual, NSA data. It’s not that difficult, yet no one does it.

In the week ended July 7 actual claims (not seasonally finagled) were 444,000 (rounded) including the addition of 4,000 claims to adjust for incomplete state counts that do not include interstate claims at the time of the advance release (current week). This week was better than the week ended July 9, 2011 when new claims totaled 474,000. Total new claims were also better than the average of the last 10 years’ claims for this week of 461,000. Approximately 74,000 or 6.4% fewer people filed first time claims this year than in the same week in 2011.

How can the SA number be so far off? Simple. The factors are arbitrary. Over the last 10 years, the actual NSA number has been multiplied by factors ranging from .745 to .895. That means that the range of variance for the factor for this week is 20%. That’s just absurd. This year the factor applied to this week’s actual number was .796. Below is what it looks like graphically.

To accurately reflect the actual year to year to year change of a drop 6.4% in new claims, the SA number should be 6.4% less than the SA number for this week last year. That would be 384,000. At that number, the “correct” SA factor would have been .864. Instead, based on the arbitrary formula of the standard ARIMA seasonal adjustment methodology the Labor Department applied a factor of .796, resulting in new claims for the week being drastically understated.

Initial Unemployment Claims Seasonal Adjustment Factors - Click to enlargeInitial Unemployment Claims Seasonal Adjustment Factors – Click to enlarge

This week each year has always had a large increase in claims. This year was no different. The current week to week change was an increase of 74,000. That was greater (worse) than last year’s increase of 67,000 but less (better) than the 10 year average jump of 82,000.

Overall, this week’s data shows that the trend is still improving (chart below), and that the rate of improvement is well within the normal range of the past 2 years. The slope of the year to year line for this week is declining at a slightly slower rate than the slower 52 week moving average. Such variances are normal.

The annual rate of decrease in new claims continues to oscillate around the -10% axis. The latest data was down by 6.4%. Only if that difference shrinks to less than 3% that could be the first clear warning of a potential decline in employment ahead. Anything between a decline of 3% and 20% year to year suggests that the improving trend is on track. On the basis of this data at least, the Fed has no reason for additional QE (more in depth analysis in the Professional Edition Fed Report).

Initial Unemployment Claims - Click to enlargeInitial Unemployment Claims – Click to enlarge

Plotted on an inverse scale, the correlation of the trend of claims with the trend of stock prices over the longer term is strong. Both are driven by the Fed’s operations with Primary Dealers as covered weekly in the Professional Edition Fed Report. See also The Conomy Game, a free report. This chart suggests that the as long as this trend in claims is intact, the S&P would be overbought at approximately 1450, and oversold at roughly 1200. The Professional Edition Daily Market Updates cover my take on the technical side of the market for those who follow the charts in that regard.

Initial Unemployment Claims and Stock Prices - Click to enlargeInitial Unemployment Claims and Stock Prices- Click to enlarge

As the number of workers eligible for unemployment compensation has trended up since 2009, the percentage of workers filing first time claims has continued to decline. Comparing the current week yearly line to the 52 week moving average, the trend of improvement has slowed slightly.

Initial Unemployment Claims Percentage of Total Employed - Click to enlargeInitial Unemployment Claims Percentage of Total Employed – Click to enlarge

The chart below gives a longer term perspective on claims. We can see the trend improving but still above the bubble years with their 10 million fake jobs taking orders for new and unneeded condos and houses, building them, and taking and processing mortgage applications. This however does not account for the thousands of mortgage industry executives and Wall Street bankers who should be in jail but who still have jobs, and still bribe politicians.

Lately, conomists have been arguing about the “natural” unemployment rate. I think we’re at it now. The problem the conomists have is that they think the bubble rates with their 10 million fake jobs were normal. That was abnormal. Today is normal.

Initial Unemployment Claims Long View - Click to enlargeInitial Unemployment Claims Long View – Click to enlarge

The following chart is a picture of reality versus the the Impressionist art of seasonal adjustments. Sometimes the SA data represents reality to some degree, and sometimes it doesn’t. If you are following only that data, at any given time you have no way of knowing which it is. One thing is certain–photo-realism it ain’t. There are ways to measure trends using actual data. One way is shown on this chart, which is to show the year to year line as of the current and corresponding date. Another is to view the annual rate of change as shown in the first chart above. In the most recent weekly data, the SA data suggests that the drop in claims was much greater than it actually was. The arbitrary seasonal adjustment process has raised a couple of false alarms over the past 2 years with big counter trend pops early in the second half of 2010 and in the second quarter last year. This week it gave a false positive reading, which conomists are furiously trying to explain away, when the explanation is mundane and simple. The SA data is just wrong.

Initial Claims, Seasonally Manipulated vs. Actual - Click to enlargeInitial Claims, Seasonally Manipulated vs. Actual – Click to enlarge

More Economic Charts

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