by Lee Adler, Wall Street Examiner
First time unemployment claims rose sharply as of October 5, as the effects of the chaos in Washington began to ripple through the economy. However, as I pointed out last week, the recent strength reflected in the claims data “should change radically in the weeks ahead. In the short run the data will weaken, but more important will be what happens after the government reaches a deal on the budget and the debt ceiling.”
Meanwhile, the media had some lame excuse about California’s reporting software being effed up as part of the reason for the big jump. That doesn’t wash. Two weeks ago the reports were that the glitches in the new software had been ironed out. If earlier claims hadn’t been reported, why were there no significant upward revisions applied to past weeks either in the current or prior reports. No, this jump in claims is real, and it is fallout from the gummit shutdown. I would expect most of this weakness, to be reversed once this mess is settled. The big question is how much.
The Labor Department reported that in the week ending October 12, the advance figure for seasonally adjusted initial claims was 358,000, a decrease of 15,000 from the previous week’s revised figure of 373,000. The 4-week moving average was 336,500, an increase of 11,750 from the previous week’s revised average of 324,750.
The consensus estimate of economists of 330,000 for the SA headline number was too low for the second straight week (see footnote 1) as economists had were clueless to the impact of the government shutdown. They apparently are not aware of the real-time hard data on Federal Withholding taxes, which I track weekly in the Treasury Update. They showed withholding tax collections dropping sharply over the past month. The two week jump in claims on the actual, not seasonally adjusted basis is not about a computer glitch in California. The tax data confirms that it’s real.
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 357,041 in the week ending October 12, an increase of 20,902 from the previous week. There were 362,730 initial claims in the comparable week in 2012.” [Added emphasis mine] See footnote 2.
The October 5 week was the first year to year increase since early January. The number for the latest week was an improvement, but not by much. Actual filings last week represented a decrease of 1.6% versus the corresponding week last year. These numbers are much weaker than the average for the past couple of years. On an actual, not seasonally adjusted basis the trend of claims has turned flat since October 2011. However, that might not have been the case in the absence of the government shutdown. Let’s see what November, and a return to “normal” brings.
Initial Unemployment Claims
There’s usually significant volatility in this number with a usual range of zero to -20%. Prior to the October 5 week it had been consistently strong. Excluding the mid September reported “glitch” weeks, over the 2 months before that the rate of decline was -10% to -13%. The average weekly year to year improvement of the past 2 years is -8.1%. In the second and third quarters, claims as a percentage of the total employed were at levels last seen at the end of the housing bubble, just before the market and economy collapsed.
Initial Unemployment Claims Percentage of Total Employed
That all changed when the government shutdown began. Now that a political deal has been struck to kick the can down the road for 3-4 months and federal workers are going back to work, the question is if claims will return to their recent past pattern, or if this shock to the system has a lasting impact. We probably won’t know the complete answer for a month or two. If the numbers snap back sooner, that would indicate no lasting damage.
The current weekly change in the NSA initial claims number is an increase of 22,000 (rounded and adjusted for the usual undercount) from the previous week. That compares with an increase of 33,000 for the comparable week last year. The second week of October was an up week 70% of the time in the prior 10 years. The average change for the comparable week over the prior 10 years was an increase of 14,000. The numbers for this week were better than last year but somewhat worse than average. Some Federal workers were “unfurloughed” last week. The rest should be back next week, but new claims from the shutdown should stop increasing in the data for this week to be released next Thursday.
Federal withholding tax data has slumped sharply since the end of September. It was still on trend until late September when there was a sharp downtick. That continued through October 15. The government shutdown clearly had an effect on withholding taxes collected. Economists have no excuse for missing these numbers by as much as they did.
To signal a weakening economy, current weekly claims would need to be greater than the comparable week last year. That happened in the October 5 week, but I gave it a mulligan. The trend had previously been one of accelerating improvement in spite of the fact that the comparisons are now much tougher than in the early years of the 2009-13 rebound. I want to see what happens now that Federal workers are going back to work. Will this data return to trend or not? The answer to that question will tell us whether the shutdown has any long term effect on the economy.
The government shutdown polluted this data. I suggested last week that we take it with a grain of salt while everyone else was crying, rending their clothes, and gnashing their teeth, or blaming a glitch. Over the next couple of weeks we get back to the real game.
Relative to the trends indicated by unemployment claims, stocks have been extended and vulnerable since May. QE has pushed stock prices higher but has done nothing to stimulate jobs growth.
I plot the claims trend on an inverse scale on this chart 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 appeared to have ended in July but the zombie has kept coming back to life. I address the specific potential outcomes in my proprietary technical work.
More charts below.
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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.
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.
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Initial Claims Seasonal Adjustment Off Track
The actual data shows a flat trend for the past two years while the SA data shows claims still in a downtrend. That’s misleading.
Initial Unemployment Claims Long View
Four years into recovery, claims have leveled off at a level equal to the second year of the recovery from the 2002 recession. Four years into that recovery, claims were below 300,000 per week at this point in the year.
Initial Unemployment Claims Seasonal Adjustment Factors
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 near the low end of the historical range.
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