by Lee Adler, Wall Street Examiner
The latest weekly jobless claims data was right on trend again this week. Initial claims for unemployment compensation declined at an annual rate of 11%, which was slightly better than last week’s rate and better than the average of the past two years. That data is far too strong to trigger the Fed’s print response and allows the Fed an excuse to taper QE in September. However, the data still does not support the stock market’s recent gains.
Stock prices remain extremely extended relative to the claims trend. This is the power of Fed money printing to move stock prices. QE has done nothing to stimulate jobs growth however. The rate of change in claims hasn’t changed since 2011 whether the QE spigot was turned on or turned off.
The Labor Department reported that in the week ending August 10, the advance figure for seasonally adjusted initial claims was 320,000, a decrease of 15,000 from the previous week’s revised figure of 335,000 (was 333,000). The consensus estimate of economists of 339,000 for the SA headline number was slightly too pessimistic (See footnote 1).
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 280,502 in the week ending August 10, a decrease of 8,142 from the previous week. There were 317,680 initial claims in the comparable week in 2012.” [Added emphasis mine] (See footnote 2)
Initial claims as a percent of total employed have recently declined to levels last seen during the housing bubble (See chart addendum at end of post).
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 1,900 shy of the final number for that week released Wednesday. For purposes of this analysis, I adjusted this week’s reported number up by 1,800 to 282,000 after rounding. It won’t matter that it’s a thousand or two either way in the final count next week. The differences are essentially rounding errors, invisible on the chart.
Initial Unemployment Claims
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The actual filings last week represented a decrease of 11.1% versus the corresponding week last year. The prior week was down 9.9%. There’s usually significant volatility in this number but over the past 3 weeks the rate of decline has been around 10-11%. The average weekly year to year improvement of the past 2 years is -8%, with a range from near zero to -20%. The year to year comparisons are now much tougher than the 2010-2012 period as the number of job losses declined sharply between 2009 and 2012, so some slowing in the rate of improvement is to be expected. That hasn’t happened yet.
The current weekly change in the NSA initial claims number is a drop of 6,300 from the previous week. That compares with a drop of just 2,500 for the comparable week last year and an average change of a decrease of 5,800 for the comparable week over the prior 10 years. This week’s data was about average in that context.
To signal a weakening economy, the comparisons would need to turn negative. Current weekly claims would need to be greater than the comparable week last year. That hasn’t happened. The trend has been one of steady improvement. The fact that the latest week was down 11% from last year is impressive given that these comparisons are now much tougher than in the early years of the 2009-13 rebound. This data suggests that the economy is still on the same track it has been on since 2010.
Real time federal withholding tax data (which I update weekly in the Treasury Report) suggests that there’s been some weakening in employment in July and early August with a break of the trend of improvement that had been under way all year. This data lends support for the lowering of economic expectations for the start of the third quarter. The withholding data for July tipped us off to the fact that July jobs might come in a tad weaker than expected, which they did. That proved a more reliable indication than the stronger ADP report on private payrolls for July.
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.
Once again, the claims data didn’t ring the bell this week. The Fed still has an excuse to begin tapering QE in September.
I plot the claims trend on an inverse scale on the chart below with stock prices on a normal scale. This comparison suggests that bubble dynamics are at work in the equities market, thanks to the Fed’s money printing. Those dynamics may have ended here, or they could become even more extreme depending on whether stock prices continue their pullback or break out. I address the specific potential outcomes in my proprietary technical work.
Initial Unemployment Claims and Stock Prices
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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.
Initial Claims Seasonal Adjustment Off Track
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Initial Unemployment Claims Percentage of Total Employed
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Initial Unemployment Claims Long View
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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 in the middle of the historical range.
Initial Unemployment Claims Seasonal Adjustment Factors
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