The media proclaimed that the initial unemployment claims report last week beat economists expectations, and was therefore good news. A hard look at the actual data says otherwise.
The Labor Department reported that seasonally adjusted (SA) first time claims for unemployment fell by 29,000 to 343,000 from a revised 372,000 (was 370,000) in the advance report for the week ended December 8, 2012. The number was better than the consensus median estimate of 375,000 reported by Bloomberg in a survey of economists. But an examination of the actual, not seasonally adjusted data shows that this was not a good number.
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 428,814 in the week ending December 8, a decrease of 72,117 from the previous week. There were 435,863 initial claims in the comparable week in 2011.” [Added emphasis mine] The year to year decline was at the rate of -1.2%. In the prior week the year to year rate of decline was -5.3%. Large week to week changes in this momentum are common, but the rate is potentially troubling because it has reached a parameter which, if exceeded in ensuing weeks, would indicate that the economy had stalled.
There was an extraordinary increase in the data in the opposite direction of a persistent 3 year trend of improvement after Hurricane Sandy. That was largely reversed in the week ended November 17. However, the rate of year to year improvement has slowed. While this may be partly due to the after effects of the storm, it also appears to be part of a trend of slightly slowing improvement that’s been underway since 2011. The improvement in this measure has been losing momentum over the past year. Any further deterioration in the rate of change could result in the end of the 3 year trend of fewer initial claims.
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.
Normally the increase between the advance number and the final number the following week has been around 2,000-4,000. Last week it was 2,000. Accordingly, I adjusted this week’s reported number up by 2,000. The adjusted number that I used in the data calculations is 431,000, rounded. On this basis, the year to year decrease in initial claims was approximately -5,000 or 1.2%.
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.
The week to week change was a decrease of 70,000. The second December report always shows a big decrease. The average change for the 10 years from 2002 to 2011 was a decrease of approximately 82,000. Last year that week had a drop of 93,000 and 2010 saw an decrease of 95,000. By these standards, this year was not as strong as each of the last two years, and also not as good as the average for the past 10 years.
The annual rate of change in initial claims had ranged from -3% to -20% every week from mid 2010 through mid October 2012, with a couple of temporary minor exceptions, including the surge related to Superstorm Sandy. Since mid 2011 the annual rate of change was within a couple of percent of -10% in most weeks. The trend was remarkably consistent. But a second trend is now also visible on the annual rate of change graph at the bottom of the chart. It shows a channel of slightly higher lows and higher highs indicating a slowing rate of improvement as the trend moves toward zero year to year change. This week’s annual rate of change at -1.2% is at the upper limit of that channel. Any move weakening from here, would break the channel. If that were to persist for more than a couple of weeks, it would suggest that the trend had ended, and possibly reversed.
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 has suggested for a while that as long as the trend in claims is intact, the S&P would be overbought at approximately 1450, and oversold at roughly 1220. On that basis it became overbought in mid September.
The market has pulled back since then, but whether it’s headed all the way to 1200 is doubtful, given that the Fed’s QE 3 purchases began to settle just in mid November. The expansion of QE now means that the Fed’s balance sheet could grow by a 40% annual rate sending lets of cash toward the market for the duration of the program.
I expect the Fed to also to attempt to paper over the “fiscal cliff” if it occurs, just as it did with Y2k. I call the prospective anti fiscal cliff money printing, the “fiscal cliff notes” program. The Y2k papering episode helped to trigger the final blowoff of the internet bubble in Q1 2000. If no “Grand Bargain” is reached on the fiscal cliff, I expect Fed policy and the result to rhyme with Y2k in Q1 of 2013.
Some bubble jobs will likely be created in the process. But at the same time, the inflation that accompanies the money printing, whether in asset prices, commodities, or in consumer prices will force the Fed to stop QE. At that point the markets and economy will deal with the hangover from the program.[I cover the technical side of the market in the Professional Edition Daily Market Updates.]
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