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Bubbly Stock Prices Running Away From Improving Jobless Claims

by Lee Adler, Wall Street Examiner

The trend toward fewer initial unemployment claims continued this week at a pace near the best levels of the past several years. However, spurred on by QE, bubbling stock prices are increasingly ahead of this trend.

The Labor Department reported today that the seasonally adjusted (SA) representation of first time claims for unemployment fell by 4,000 to 323,000 from a revised 327,000 (was 324,000) in the advance report for the week ended May 1, 2013. The consensus estimate of economists of 336,000 for the SA headline number was too pessimistic for the third straight week. It is normal for forecasters to be wrong, not just because economic forecasting is quackery, but also because the seasonally adjusted number, being made-up,  is impossible to consistently guess (see endnote).

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 today’s press release,

“The advance number of actual initial claims under state programs, unadjusted, totaled 298,497 in the week ending May 4, a decrease of 2,638 from the previous week. There were 341,080 initial claims in the comparable week in 2012.”  [Added emphasis mine]

For purposes of this analysis, I adjusted this week’s reported number up by 2,500. The advance report 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 number was approximately 2,500 shy of the final number for that week released today. The adjusted number that I used in the data calculations and charts for this week is 301,000, rounded. The final number for the week, to be released next week, should be near that.

The actual filings represent a decrease of  12.1% versus the corresponding week last year. That’s even better than the 9.7% drop last week and the same as the drop the week before that. It’s also better than the average year to year improvement of the past 2 years of -8.9%. The year to year comparisons are now much tougher as the number of job losses declined sharply between 2009 and 2011, so this week’s number is all the more impressive, especially given that it follows very good numbers for the two previous weeks.

The current week to week change in the NSA number is virtually unchanged. That compares with an average change of a decrease of 12,000 for the same week over the prior 10 years. The comparable week has had extreme variations with both increases and decreases. In 2012 the comparable week had an increase of 9,000, while in 2011 there was a decrease of 18,000.

The Labor Department, using the usual statistical hocus pocus, applied seasonal adjustment factors ranging from about 1.15 to about 1.08 to the week corresponding to this one over the last 10 years. This week they applied a factor of 1.08.

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The correlation of the broad trends of claims with the trend of stock prices over the longer term is strong. It is clearly visible when the claims trend is plotted on an inverse scale with stock prices on  a normal scale.

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Stock prices were running with the initial claims trend until the Fed started QE3 and 4 late last year and early in 2013, causing the stock price rise to accelerate. The Fed’s QE3-4 money printing campaign has had far more success in creating a stock market bubble, which was one of Bernanke’s stated goals (in slightly different words) than in driving economic growth.

As long as the trend of new claims remains strong and the Fed (now joined by the BoJ) keeps cashing out the Primary Dealers every month via its asset purchase programs (QE3-4), I would not expect the uptrend channel in stocks to break down.

This report is excerpted from the Permanent Employment Charts page – More charts!

Note: 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.

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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.

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