Initial Unemployment Claims Increase, But Trend of Improvement Is Intact

by Lee Adler, Wall Street Examiner

This post is excerpted from the permanent Employment Charts page, which includes numerous additional charts and analysis on key employment metrics.

The Labor Department reported that the seasonally adjusted (SA) representation of first time claims for unemployment fell  by 5,000 to 366,000 from a revised 371,000 (was 368,000) in the advance report for the week ended February 2, 2013.  Actual, unadjusted claims as counted by the 50 states rose by 16,696.

The headline number was slightly worse than  the consensus median estimate of 360,000 reported by major business media. Seasonal adjustment remains a haphazard and arbitrary process that always yields a fictitious number.

The 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 386,176 in the week ending February 2, an increase of 16,696 from the previous week. There were 401,365 initial claims in the comparable week in 2012.”  [Added emphasis mine]

This year’s filings represented a decrease of  3% over the referenced week last year.  Due to the calendar factors,  the current week would more correctly be compared with the week ended January 28, 2012. Using that date the decline was 33,000 or -8.2%.

Claims always peak in the first full  week ended in January. This year, that was the week which ended on January 12.   Last year  it was the week ended January 7.   Because the government and mainstream analysts make the “year-to-year” comparison  versus 52 weeks ago, not exactly a year ago, that’s a problem this year, partly due to the fact that last year was a leap year with 366 days or 52.29 weeks.  Therefore, comparing the January 12 week this year with the January 14, 2012 week was not an “apples to apples” comparison, nor are the following weeks.  In this case, the “like” peak claims week for the January 12 week this year versus last year was the one ended January 7, 2012.

The current week is 4 weeks after the week of peak claims this year. Using the peak claims week of January 7, 2012 as the benchmark week last year, the apples to apples comparison for the week ended February 2 this year would be the one ended January 28, 2012. Using that date, the drop of 8.2% is consistent with the trend this series has been on for the past couple of years. Even without that calendar adjustment the year to year change would still have been within the trend parameters.

Beginning in March this date shifting of the year to year comparison should no longer be necessary because the year to year difference will return to 365 days from 366. However, the problem of weekly drift never goes away completely, so it is always important to consider this in the comparisons. Sometimes it skews them just enough to make the numbers look better or worse than they actually were.  Based on comparing like to like weeks, this week’s data is well within the trend of the past two years.

Note: The DOL specifically warns that this is an advance number and states that not seasonally adjusted numbers are the actual number of claimants from summed state claims data. The advance number is virtually always adjusted upward the following week because interstate claims from many states are not included in the advance number. The final number is usually 2,000 to 4,000 higher than the advance estimate. I adjust for this in analyzing the data.

I adjusted this week’s reported number up by 3,000, based on last week’s DOL revision. The adjusted number that I used in the data calculations is 389,000, rounded.

Note: To avoid the confusion inherent in the  fictitious SA data, I analyze the actual numbers of claims (NSA). 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 week to week change was an increase of 20,000 in the NSA number.  That was worse than usual for the fourth full week after the early January claims peak. Over the previous 10 years the comparable week has usually had increases. The average change for the 10 years from 2003 to 2012 was an increase of approximately 11,000.  In 2012 it was 5,000 while in 2011 there was a decline of 24,000. That was the best performance  of that 10 year period.  Seven of those years had a smaller week to week increase (two decreased)  than this year. It’s too early to conclude that this is signaling a slowing of job growth momentum, especially given that the year to year change is well within the parameters of the trend.

From mid 2010 through mid October 2012 the annual rate of change in initial claims had ranged from -3% to -20% every week, with a couple of temporary minor exceptions, including the Superstorm Sandy surge. Since mid 2011 the annual rate of change was within a couple of percent of -10% in most weeks. The trend has been remarkably consistent.

A second trend has become visible on the 52 week rate of change graph (bottom of chart below). It shows a channel of slightly higher lows and higher highs indicating a slowing rate of improvement as the trend moved toward zero year to year change. The “like-to-like” week, annual rate of change of -8.2% is near the middle of these trends.

Normally, I would expect some moderation in the rate of improvement in the weeks and months ahead. Further reductions in the number of new claims should be much more difficult to achieve going forward as the year to year comparisons become tougher.

The consensus of economists is that increases in income taxes and spending sequesters will slow the economy. So far, there’s no evidence that the tax increases that went into effect at the beginning of the year are hurting. The Fed’s money printing may be stimulating bubble dynamics, which could cause employment growth rates to increase, more than offsetting the negative impact of tax increases and spending cuts. The markets may cheer this, but it will be artificial, sustainable only as long as the Fed continues its money printing operations.

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[The following repeated from past updates] Plotted on an inverse scale, the correlation of the trend of claims with the trend of stock prices over the longer term is strong, while allowing for wide intermediate term swings in stock prices. Both trends are largely driven by the Fed’s operations with Primary Dealers (covered weekly in the Professional Edition Fed Report; See also The Conomy Game, a free report).

The chart below suggests that the market trend is overbought at approximately 1500, assuming that the trend in claims remains relatively constant. This has been a long standing projection. Now that the market has reached this parameter, the question is whether additional Fed money printing will cause those trends to tilt more steeply upward. The year to year trendline in claims has been remarkably consistent. If stocks break out, unless the claims trend begins to show consistent evidence of acceleration, stocks would become more overbought versus that trend, and eventually vulnerable to a big decline.

Under the current QE regime,  the Fed’s balance sheet will grow by a 38% annual rate this year sending lots of cash through the market, with some of it trickling into the economy for the duration of the program. This is unlike 2011 when the market became extended relative to the unemployment claims trend.  Then, the Fed was simultaneously ending QE2, thus starving the monster of its lifeblood. As a result, the market pulled back sharply after reaching the top of the channel.  This year, the Fed is intent on fattening the calf. That would allow the S&P to bump along the top of the channel as long as the jobs trend stays intact. However, any breakout in stock prices without a complimentary acceleration in the the improving trend of claims would lead to a dangerous over-extension in stock prices.

Some bubble jobs will likely be created as the Fed pumps a net of $85 billion per month into the financial markets.  However, the inflation that should accompany the money printing, whether in asset prices, commodities, or in consumer prices, should eventually force the Fed to stop QE. At that point the markets and economy will deal with the hangover from the program. The greater the extension of stock prices above the trend of claims on this chart, the greater the risk of a major correction, crash, or bear market.

[I cover the technical side of the market in the Professional Edition Daily Market Updates.]

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