Actual Initial Claims Data Much Stronger Than Headline Number, Keeping Market On Fed’s Plot
Lee Adler, Wall Street Examiner
The Labor Department reported that the seasonally adjusted (SA) representation of first time claims for unemployment rose by 17,000 to 361,000 from a revised 344,000 (was 343,000) in the advance report for the week ended December 15, 2012. The number was very close to the consensus median estimate of 360,000 reported by Bloomberg in a survey of economists.
The actual data was a little better than the seasonally adjusted representation. Along with the headline seasonally adjusted data, which is the only data the media reports, the Department of Labor (DOL) reports the not seasonally adjusted data. It said in today’s press release, “The advance number of actual initial claims under state programs, unadjusted, totaled 400,422 in the week ending December 15, a decrease of 28,766 from the previous week. There were 421,103 initial claims in the comparable week in 2011.” [Added emphasis mine] The year to year decline was at the rate of -4.7%. In the prior week the year to year rate of decline was -1.2%.
There was an extraordinary increase in the data in the opposite direction of a persistent 3 year trend of improvement after Hurricane Sandy. That was largely reversed in the week ended November 17. However, the rate of year to year improvement has slowed. While this may be partly due to the after effects of the storm, it also appears to be part of a trend of slightly slowing improvement that’s been underway since 2011. The improvement in this measure has been losing momentum over the past year. However, this week’s rate of change was better than last week.
Note: The DOL specifically warns that this is an advance number and states that not seasonally adjusted numbers are the actual number of claimants from summed state claims data. The advance number is virtually always adjusted upward the following week because interstate claims from many states are not included in the advance number. The final number is usually 2,000 to 4,000 higher than the advance estimate. I adjust for this in analyzing the data.
Normally the increase between the advance number and the final number the following week has been around 2,000-4,000. Last week it was less than 1,000. Accordingly, I adjusted this week’s reported number up by 1,000. The adjusted number that I used in the data calculations is 401,000, rounded. On this basis, the year to year decrease in initial claims was approximately -28,000 or -4.7% versus a drop of 1.2% last week.
Note: To avoid the confusion inherent in the fictitious SA data, I analyze the actual numbers of claims (NSA). 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 week to week change of a decrease of 28,000 was better than usual for the third December report. Over the previous 10 years the comparable week has had both increases and decreases. The average change for the 10 years from 2002 to 2011 was an increase of approximately 2,000. Last year that week had a drop of 15,000 and 2010 saw an increase of 5,000. This year was better than each of the last two years, and also better than the average for the past 10 years.
From mid 2010 through mid October 2012 the annual rate of change in initial claims had ranged from -3% to -20% every week, with a couple of temporary minor exceptions, including the surge related to Superstorm Sandy. Since mid 2011 the annual rate of change was within a couple of percent of -10% in most weeks. The trend was remarkably consistent. But a second trend is now also visible on the annual rate of change graph at the bottom of the chart below. It shows a channel of slightly higher lows and higher highs indicating a slowing rate of improvement as the trend moves toward zero year to year change. The December 8th week’s annual rate of change at -1.2% was at the upper limit of that channel. The current weekly reading of -4.7% is back within the channel. For the time being at least, the improving trend continues, but at a slower rate over the past 3 months.
Plotted on an inverse scale, the correlation of the trend of claims with the trend of stock prices over the longer term is strong, while allowing for wide intermediate term swings in stock prices. Both trends are largely driven by the Fed’s operations with Primary Dealers (covered weekly in the Professional Edition Fed Report; See also The Conomy Game, a free report). The chart below has suggested for a while that as long as the trend in claims is intact, the S&P would be overbought at approximately 1450, and oversold at roughly 1220. On that basis it became overbought in mid September.
The market pulled back since then, but the correction has been far smaller than in 2011 when the upper limit of the channel was hit. Given that the Fed’s QE 3 purchases began to settle just in mid November it is unlikely that correction similar to 2011′s will occur. The expansion of QE now means that the Fed’s balance sheet could grow by a 40% annual rate sending lets of cash toward the market for the duration of the program. When the market became extended relative to the unemployment claims trend in 2011, the Fed was simultaneously ending QE2 starving the monster of its lifeblood. This year, the Fed is intent on fattening the bull.
Some bubble jobs will likely be created in the process. But at the same time, the inflation that normally accompanies money printing, whether in commodities or in consumer prices will gather steam, eventually force the Fed to stop QE. At that point the markets and economy will deal with the hangover from the program. The first signs that inflation is beginning to squeeze the economy ought to show up in the initial claims data. As long as they continue to show improvement on a year to year basis, I see no reason for the stock market to lose the plot that the Fed has laid out.
[I cover the technical side of the market in the Professional Edition Daily Market Updates.]
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