The Labor Department reported that seasonally adjusted (SA) first time claims for unemployment fell by 23,000 to 369,000 from a revised 392,000 (previously 388,000) in the advance report for the week ended October 20, 2012. The consensus estimate of 375,000 was a miss, although somewhat less off the mark than usual. This week’s data partially corrected the calendar issues that impacted last week’s report bringing the number more in line with the trend.
Along with the headline seasonally adjusted data, which is the only data the media reports, the Department of Labor (DOL) reports the not seasonally adjusted data. It said in today’s press release, “The advance number of actual initial claims under state programs, unadjusted, totaled 342,702 in the week ending October 20, a decrease of 20,032 from the previous week. There were 377,156 initial claims in the comparable week in 2011.” [Added emphasis mine]
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.
Lately the increase between the advance number and the final number the following week has been around 2,500-4,000. Last week it was closer to 3,500 which is what I used this week as the adjustment. The adjusted number that I used in the data calculations is 346,000, rounded. On this basis, the year to year decline in initial claims was approximately 31,000 or 8.2%.
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.
As I surmised last week that it would, the rate of change settled back within the range of weekly fluctuations in the rate of change from -3% to -20% that have occurred since mid 2010. Since mid 2011 the annual rate of change has been within a couple of percent of -10% in most weeks. The trend has been remarkably consistent. Trips outside the range have been rare, and have been due to statistical aberrations rather than any “facts on the ground.” Most of the time the rate of change has been within a few percent of the average decline of 10% since October 2010. Nothing has changed.
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The SA data has been trending fairly close to the actual NSA data since early October. Prior to that, for most of 2012 the SA data was trending flatter than the NSA data, understating the degree of improvement in the trend. I had been pointing out the simple fact that the seasonally adjusted data was misrepresenting the trend for the past several months. It has not been unusual over the past couple of years for the SA trend to be wrong. Regardless of how the NSA actual data goes in the weeks ahead, the seasonally adjusted data will go off track sooner or later. It’s just the nature of the beast.
Note: The following chart is a picture of reality versus the the Impressionist art of seasonal adjustments. Sometimes the SA data represents reality to some degree, and sometimes it doesn’t. If you are following only The SA data, at any given time you have no way of knowing which it is. One thing is certain– it is not photo-realism.
There are ways to measure trends using actual data. One way is to show the year to year line as of the current and corresponding date, as shown on the chart below. Another is to view the annual rate of change as shown in the chart above.
As the number of workers eligible for unemployment compensation has trended up since 2009, the percentage of workers filing first time claims has continued to decline. Comparing the yearly line for the current week to the 52 week moving average, the trend of improvement has tracked with rare exceptions. This graph shows a return to the levels of 2004, just before the bubble began to accelerate.
Lately, economists have been arguing about the “natural” unemployment rate. I think we’re at it now. If we recognize that the bubble period with its millions of fake jobs was abnormal, then the low level of claims during 2006 and 2007 was also abnormal. Where we are today is probably normal and the expectation that the US will ever get back to 6% or 5.5% unemployment, as suggested in early October by Minneapolis Fed President Katcherlakota, is a false hope.
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). This chart suggests that as long as this trend in claims is intact, the S&P would be overbought at approximately 1450, and oversold at roughly 1200. On that basis it became overbought in mid September. Since then the market has made no progress, but only began to correct within the past couple of days.
I wrote earlier in September that “barring a much stronger improvement in the claims data which would suggest accelerating growth, the market will be at greater risk of a correction in the next few months.” But the Fed may have changed the rules on September 13, by adding more cash to the markets every month and promising to continue to so so until the unemployment rate showed sustained improvement. That will take until a new bubble emerges, spawning new fake jobs, or conversely, until rises in food, energy, and materials costs force the Fed to reverse course. [I cover the technical side of the market in the Professional Edition Daily Market Updates.]
For more charts and discussion on this topic visit the permanent Employment Charts page from which this report is excerpted. That page is updated whenever new data becomes available. You can bookmark it for future reference.
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