Initial Claims Data Signals Bubble Economy Stretched To Its Limit

by Lee Adler, Wall Street Examiner

A weak US economy may be stretched to its natural limits and could be overextended, based on initial unemployment claims data.

The advance number of actual initial claims under state programs, unadjusted, totaled 269,689 in the week ending May 10, a decrease of 19,059 (or -6.6 percent) from the previous week. The seasonal factors had expected an increase of 2,887 (or 1.0 percent) from the previous week. There were 320,253 initial claims in the comparable week in 2013. – Department of Labor (DOL)

Initial Claims – Click to enlarge

Initial unemployment claims were 16% lower than the same week a year ago. This is at the low end the range of the past 3.5 years which has typically fluctuated between -5% and -15% with a handful of outliers.

The seasonally adjusted headline number was 297,000. According to one major survey, the consensus of Wall Street economists was for a gain of 325,000. The seasonally adjusted number is a fictitious number made up to smooth the trend to account for seasonal differences. While these numbers are a representation of the trend, they sometimes give false impressions. This week the strength of headline impression and the actual trend were consistent.

Regardless of whether the headline print accurately represents the reality or not, the market reacts to that headline print, not the actual trend. While this data is not a market trend driver, it is of interest as a potential early warning indicator that the stock market trend is not consistent with the trend of the economy. It alerts us to bubble behavior in the markets.

The actual weekly change of a decrease of -19,000 was better than the 10 year average for this week of a decline of less than -1,000. In the second May weekly reading last year the week to week change was an increase of 18,000. The current reading was a marked strengthening in comparison.

The current weekly number was at the strongest level since this week of May in 2007. New claims were 0.195% of total nonfarm payrolls, or 1,950 per million workers counted in nonfarm payrolls in May. That is similar to the May 2007 reading of 0.192%, or 1,920 per million workers as the economy was just about to collapse. At the end of the housing bubble in May 2006, the rate was just 0.214%, or 2,140 per million. By this standard, the economy appears to be stretched to its limit.

Claims Per Million Workers – Click to enlarge

This is as strong as it is likely to get. While stocks have run away in a Fed printed bubble under QE3-4 the pattern of unemployment claims looks like it did in 2007 after the Fed printed housing bubble peak of 2006, and just as the financial crisis boiling beneath the surface was about to hit the headlines. The similarity of the current pattern should a clear warning that the Fed has pushed the economy to the breaking point in the current financial engineering bubble.

Claims Pattern Looks Like 06-07 – Click to enlarge