First time unemployment claims data has been extremely strong in recent weeks. The government and pundits (including yours truly) blamed an undercount of claimants due to software upgrades in two states. The scuttlebutt was that not all claims had been reported.
But subsequent weekly adjustments to the data have been no greater than normal. The big declines in claims appear to be real. The data is supported independently by the real time Federal Withholding Tax data reported by the Treasury Department. All of which leads to the question, “Is the economy overheating and the Fed doesn’t know it?”
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The Labor Department reported that in the week ending September 21, the advance figure for seasonally adjusted initial claims was 305,000, a decrease of 5,000 from the previous week’s revised figure of 310,000. The 4-week moving average was 308,000, a decrease of 7,000 from the previous week’s revised average of 315,000. The consensus estimate of economists of 325,000 for the SA headline number was way too high (see footnote 1) as economists remain too pessimistic and apparently unwilling to pay heed to the real-time hard data on Federal Withholding taxes, which I track weekly in the Treasury Update.
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 253,668 in the week ending September 21, a decrease of 19,250 from the previous week. There were 303,685 initial claims in the comparable week in 2012.” [Added emphasis mine] See footnote 2.
The actual filings last week represented a decrease of 16.5% versus the corresponding week last year. Excluding the last two weeks when the DOL reported that not all state claims had been counted due to software upgrades in a couple of states, this week’s annual rate of change is the largest decline since early 2012 (excluding weeks skewed by Superstorm Sandy).
There’s usually significant volatility in this number. The current number is within the usual range of the past two years of from zero to -20%. Excluding the last two weeks, over the prior 2 months the rate of decline was -10% to -13%. The average weekly year to year improvement of the past 2 years is -8.4%. Any way you slice it, this week’s reading was exceptionally strong. In fact, claims as a percentage of the total employed are now at levels last seen at the end of the housing bubble, just before the market and economy collapsed.
But this time is different. Really. In 2007, the Fed had stopped growing its balance sheet and later in the year it began withdrawing cash from the System Open Market Account (SOMA) in order to sterilize the earliest of its emergency alphabet soup panic programs, the TAF. The Fed wanted to hold its total assets flat. In the process it starved the Primary Dealers of their usual funding, which led to the market crash.
The current conditions are vastly different, as the Fed threw a tantrum last week and refused to reduce even one dime of the $110 billion per month (gross including MBS replacement purchases) that it is pumping into Primary Dealer accounts. No doubt initial claims will go even lower as a result. That’s not to say that good jobs are being created or that this can be sustained indefinitely. It’s just that it’s continuing for the time being and will probably continue to continue until “something happens.”
Apparently the reports of a significant undercount due to the software changes in two states were bogus. The advance weekly report on first time claims is usually revised up by from 1,000 to 4,000 in the following week when all interstate claims have been counted. Last week’s number was adjusted up by 1,500, so the reported undercount wasn’t significant. In fact, the week before when the undercount was supposedly large, the subsequent upward revision was only 1,100. The year to year decline in the September 12 week really may have been near 23.5% as I reported at the time. I viewed the number skeptically, but subsequent data supports it.
Given the low level of claims and the sharp year to year declines, is it possible that the economy is overheating, and that the Fed is unaware? It would require a suspension of disbelief, but that’s what this data suggests.
I adjusted this week’s reported number up by 1,500 to 255,000 after rounding. Normally it does not matter that it’s a thousand or two either way in the final count the following week. The differences are essentially rounding errors, invisible on the chart.
After adjustment and rounding, the current weekly change in the NSA initial claims number is a drop of 18,000 from the previous week. That compares with a drop of 27,000 for the comparable week last year, which was exceptionally strong. The average change for the comparable week over the prior 10 years was -4,500. There was probably some giveback this week from the extremely strong changes of the past two weeks.
The Federal withholding tax data was very strong for the two prior weeks, supporting the reported changes in claims, and although it softened, it was still on trend for the latest week. I had reported two weeks ago that I suspected that the claims number would have been pretty strong in any case. The reported numbers are consistent with the withholding tax data. It had a strong uptick in August followed by only slight softening in September, a sign that the economy is growing at about the same rate it has been for the past year.
To signal a weakening economy, current weekly claims would need to be greater than the comparable week last year. That hasn’t happened yet. The trend has been one of steady improvement. The fact that recent weeks have been down from last year as much as they have been is extraordinary given that these comparisons are now much tougher than in the early years of the 2009-13 rebound.
Relative to the trends indicated by unemployment claim, stocks have been extended and vulnerable since May. QE has pushed stock prices higher but has done nothing to stimulate jobs growth. The last few weeks notwithstanding, the rate of change in claims hadn’t changed much since 2011 whether the QE spigot was turned on or turned off.
Given the recent strength in this data, the Fed could have used it as an excuse for tapering QE, but like a spoiled child, it simply closed its eyes, threw a tantrum, and held tight to its money printing, regardless of the facts.
I plot the claims trend on an inverse scale on the chart below 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. Those dynamics appeared to have ended in July but the zombie keeps coming back to life, this time in a third drive toward the upper trendline. Tapering by the Fed would probably make the environment for stocks less friendly, but when bubbles enter their final runaway blowoff stage it usually takes more than a little tapping on the brakes to stop them. I address the specific potential outcomes in my proprietary technical work.
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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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 was well below the historical range.
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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