Yellow Flag for Stocks

Unemployment Claims Trend Slowing

by Lee Adler, Wall Street Examiner

The headline seasonally finagled number for initial unemployment claims was in line with Wall Street consensus. Given the vagaries of the seasonal manipulation process and the fact that it occasionally misrepresents the trend, I focus on the actual, not seasonally adjusted (NSA) data and depict the trend on a chart along with the annual rate of change.

Initial Unemployment Claims- Click to enlarge

Improvement in Initial Unemployment Claims Slows

The trend of improvement in initial unemployment claims has slowed in recent months. That’s to be expected as the year to year comparisons get tougher. But other than that, not much has changed. This week’s number was down 5.8% year over year. That compares with down 4.3% the previous week. That’s still in the range of 0 to -15% that has prevailed since 2010. It’s too soon to say if this is a sign of persistent slowing, but if it is, it would be an early warning of potential trouble for the stock market.

The Department of Labor reports the actual, NSA data, but the mainstream media ignores it. Here’s what the DOL had to say about it. “The advance number of actual initial unemployment claims under state programs, unadjusted, totaled 411,678 in the week ending January 18, a decrease of 121,020 from the previous week. There were 436,955 initial claims in the comparable week in 2013.”

The actual week to week decline of 120,000 sounds huge but it is consistent with the usual performance for the third filing week in January. The average decline for that week over the prior 10 years was 159,000. Last year the drop was 120,000. By those standards, the current week was so so, a little weaker than typical, but nothing to get excited about.

Warning for Stocks

Stock prices and initial unemployment claims have historically had a strong inverse correlation. That’s depicted on the chart below. A negative divergence developed in the final burst of the last bubble in 2007, with the trend of claims stalling from 2006 through 2007 while stock prices entered their final blowoff. It’s apparent from this chart that stock prices are again in a blowoff, but unlike the 2006-07 period, claims have not yet stalled. Their rate of improvement has slowed, but not stopped.

Initial Claims and Stock Prices – Click to enlarge

The slowing of the drop in claims over the past year shows that the Fed’s QE 3-4, which was announced in September 2012 and took effect in November of 2012, has been ineffective in stimulating greater job growth but has worked to send stock prices into the stratosphere. The big question is when the Taper will begin to bite into that. That depends on whether new Treasury supply continues to shrink. I cover that issue weekly in the Wall Street Examiner Professional Edition.

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