First time unemployment claims are currently declining at a 9% annual rate, staying close to the average year to year drop of the past two years. The economy apparently did not take a measurable hit from the increases in income tax rates that took place at the beginning of the year. Trickle from the Fed’s massive money printing has overcome any fiscal drag.
The Labor Department reported that the seasonally adjusted (SA) representation of first time claims for unemployment fell by 7,000 to 340,000 from a revised 347,000 (was 344,000) in the advance report for the week ended March 1, 2013. Because the advance report does not include all interstate claims, it is usually revised up by from 1,000 to 4,000 in the following week. The current revision was within that range.
The number beat the consensus median economists’ estimate of 350,000 reported by major business media. The consensus estimate is rarely on the mark and lately the Wall Street economic forecasting crowd has been persistently underestimating the degree of improvement in the trend. This is hard to understand given that the trend has been so persistent, and in view of the fact that real time data on tax withholding has shown very strong gains.
To be fair, the business of seasonal adjustment remains a haphazard and arbitrary process. 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 simply don’t work, or that they have a bias.
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 today’s press release, “The advance number of actual initial claims under state programs, unadjusted, totaled 333,389 in the week ending March 2, an increase of 23,198 from the previous week. There were 368,433 initial claims in the comparable week in 2012.” [Added emphasis mine]
I adjusted this week’s reported number up by 2,500, based on last week’s DOL revision. The adjusted number that I used in the data calculations and charts is 336,000, rounded.
This year’s filings represented a decrease of 8.9% versus the referenced week last year. That’s completely consistent with the trend.
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 current week to week change was an increase of 26,000 in the NSA number. That compares with an average increase of 20,000 over the prior 10 years. The comparable week showed increases in 8 of those 10 years. In 2012 the increase was 34,000 while in 2011 there was an increase of 56,000. The current week’s performance was better than 5 of those 10 years.
It seems clear that the fiscal cliff tax increases had no negative impact on the trend. The sequester should also have little noticeable impact. If there’s going to be an impact, it should start to show up in the data toward the end of March. Don’t hold your breath.
Since mid 2010 the annual rate of change in initial claims has ranged from -3% to -20% in virtually 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.
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.
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.
The conclusion from past weekly updates of the past several months still applies. Not much has changed.
The chart 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 exceeeded 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 stunning 38% annual rate this year. The Fed is and will be 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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