Are Low Claims a Warning?

Are Initial Unemployment Claims At Lowest Levels Since End of Housing Bubble and End of Tech Bubble A Warning?

by Lee Adler, Wall Street Examiner

The Labor Department reported that in the week ending November 16 the advance figure for seasonally adjusted (SA) initial claims was 323,000, a decrease of 21,000 from the previous week’s revised figure of 344,000 (was 339,000).

The consensus estimate of economists of 333,000 for the SA headline number was too pessimistic (see footnote 1). Stocks rose after the release and bonds sold off. The ritual of reacting to fictional, seasonally adjusted headline numbers goes on.

The upward revision of 5,000 to last week’s number was larger than usual this week for a second straight week. The number is always revised up because the advance number reported the first week does not include all interstate claims. By the following week they are all counted. The usual upward revision is from 1,000 to 4,000. The revision also impacted the not seasonally adjusted actual count, where 5,600 claimants didn’t make it into last week’s count in time to make the reporting cutoff.

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 322,510 in the week ending November 16, a decrease of 40,996 from the previous week. There were 403,637 initial claims in the comparable week in 2012.”

[Added emphasis mine] See footnote 2.

The 2012 number was boosted sharply by Superstorm Sandy, which had swept across the northeast coast of the US two weeks before. In addition, the current week was artificially depressed by Veterans Day on Monday of that week. State unemployment offices were closed, so some claims may not have been filed, although it’s reasonable to assume that most claimants would have made it in to file over the rest of the week. In 2012, Veterans Day fell on a Sunday.

After jumping during the government shutdown, claims have returned to trend, in the past couple of weeks being on the strong side of the trend. That is partly due to the comparisons with the post Superstorm Sandy spike in 2012. Actual filings last week were down 19.1% versus the corresponding week last year. The trend average is -8.4% per year over the past 104 weeks.

Initial Unemployment Claims - Click to enlargeInitial Unemployment Claims – Click to enlarge

There’s significant volatility in this number, with a usual range of zero to -20%. 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. They remain at a level comparable to 2007. In fact, this week’s reading is the lowest for the same week since 1999, which was at the peak of the internet and technology bubble. Think about that for a moment. Initial unemployment claims as a percentage of total employed is at levels last seen at the end of the housing bubble, and the end of the internet/tech bubble. That’s ominous.

Initial Unemployment Claims Percentage of Total Employed - Click to enlargeInitial Unemployment Claims Percentage of Total Employed – Click to enlarge

The current weekly change in the NSA initial claims number is a decrease of 37,000 (rounded and adjusted for the usual undercount) from the previous week. That compares with a decrease of 75,000 in the post Superstorm Sandy comparable week last year. The big surge in post storm claims was in the prior two weeks last year. They then began to moderate.

The current weekly change compares with the 10 year average for this week of -7,000. The third November reading was down in 7 of the prior 10 years, but the 3 years that increased saw huge increases, skewing the average. The current weekly change is consistent with the change for this week in the 7 years which showed declines. In short, it is a strong but unremarkable number, consistent with the trend.

Federal withholding tax data published in real time by the Treasury Department slumped sharply in the first half of October during the government shutdown. It has since gradually returned to the trend growth rate of the past year, which supports the view that employment growth remains on trend. I report on this data in greater detail with graphs of the trends in the weekly Professional Edition Treasury update.

Current weekly claims would need to be greater than the comparable week last year to signal a weakening economy. That has not happened. The year to year comparisons are now much tougher than in the early years of the 2009-13 rebound, but the trend rate of change has remained remarkably consistent. With those much tougher comparisons versus the prior year, I would expect some slowing in the rate of improvement to be normal, and not an indication of a weakening economy. But so far it has not happened. It raises the question of whether the economy is overheating in some respects not yet obvious to us.

Relative to the trends indicated by unemployment claims, stocks have been extended and vulnerable since May. QE has pushed stock prices higher as several economic data series show, QE does not seem to influence the trend of the economy.

Initial Unemployment Claims and Stock Prices - Click to enlargeInitial Unemployment Claims and Stock Prices- Click to enlarge

On this chart the claims trend is plotted on an inverse scale 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. That appears to be continuing. I address the specific potential outcomes in my proprietary technical research.

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 TrackInitial Claims Seasonal Adjustment Off Track – Click to enlarge

Initial Unemployment Claims Long View - Click to enlargeInitial Unemployment Claims Long View – Click to enlarge

Initial Unemployment Claims Seasonal Adjustment Factors - Click to enlargeInitial Unemployment Claims Seasonal Adjustment Factors – Click to enlarge

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 applied an increase to the actual data, rather than a decrease as in 9 of the 10 prior years.

Stay up to date with the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, along with regular updates of the US housing market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Try it risk free for 30 days. Don’t miss another day. Get the research and analysis you need to understand these critical forces. Be prepared. Stay ahead of the herd. Click this link and begin your risk free trial NOW! [I cover the technical side of the market in the Professional Edition Daily Market Updates.]

See Rick Santelli use one of my proprietary charts on CNBC to explain how the Fed impacts the stock market directly through its trades with the Primary Dealers. This is just one example of the dozens of proprietary charts that I build that will help you to clearly see and understand the market’s trend, and when that trend is beginning to change.

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