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First Time Unemployment Claims Hit Record Low But There’s a But

First time unemployment claims hit a record low as a percentage of total employed for the past 16 years, which is as far back as I have this stat.  Claims totaled just 0.169% of total nonfarm payrolls, breaking the 2006 low of 0.186%. This is less than the levels seen during the housing bubble. Are we in another bubble?

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

Probably not. Labor Department officials warned that the record low could be due to a glitch. Two states were upgrading their computer systems during the week and did not report all the claims they received. For now I’ll treat this as not material, but that could change next week. Even with large revisions, this change was so big that the revised numbers might still result in a record. If they were simply on the same trend as last week they would have been 0.19%, just off the 2006 low. We’ll just have to wait and see what they tell us next week.

The Labor Department reported that in the week ending August 31,  the advance figure for seasonally adjusted initial claims was 292,000, a decrease of 31,000 from the previous week’s unrevised figure of 323,000 (was 323,000). The 4-week moving average was 321,250, a decrease of 7,500 from the previous week’s revised average of 328,750.  The consensus estimate of economists of 327,000 for the SA headline number was way too high (see footnote 1), but their bigger than usual miss is probably due to the data glitch.

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 228,399 in the week ending September 7, a decrease of 40,250 from the previous week. There were 299,729 initial claims in the comparable week in 2012.”  [Added emphasis mine] See footnote 2.

The actual filings last week represented a decrease of  23.5% versus the corresponding week last year. That is the largest decline since the first quarter of 2011. If, for argument’s sake it was due to the glitch the Labor Department reported, and if the change from last year was at the prior week’s rate of decline, which was -13.2% year over year, then this week would have been down by 8,500, which is near the average number for this week each year.

There’s usually significant volatility in this number but the current number was clearly an outlier, well outside the usual range of the past two years of from zero to -20%. Over the prior 6 weeks the rate of decline was 10-13%. The average weekly year to year improvement of the past 2 years is -8%.

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

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. In an extremely rare occurrence, last week’s advance number was approximately 200 greater than the final number for that week posted today.  For purposes of this analysis, I adjusted this week’s reported number up by 1,000 to 270,000 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. Next week, the revision is likely to be much larger, probably an increase in the 20,000 range.

The current weekly change in the NSA initial claims number is a drop of 39,000 from the previous week after adjustment and rounding. That compares with a drop of 10,000 for the comparable week last year and an average change  of -2,000 for the comparable week over the prior 10 years. This decline was the largest reported since 2001.

This number therefore either represents exceptional strength, or glitch. Glitch accounts for most of it, but the Federal withholding tax data was quite strong for that week, so I suspect that the claims number would have been pretty strong in any case.Real time federal withholding tax data (which I update weekly in the Treasury Report) had a strong uptick in August that continued into September, a sign that the economy  actually is accelerating after a weak performance in July.

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.  Regardless of what the real final number for the latest week is, 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.

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.

Stocks remain extended and vulnerable relative to the trends indicated by unemployment claims even after the recent pullback.  QE has pushed stock prices higher but has done nothing to stimulate jobs growth. Excluding this week’s number, the rate of change in claims hasn’t changed since 2011 whether the QE spigot was turned on or turned off.

Given the recent strength in this data, the Fed can use it as an excuse for tapering QE at the upcoming FOMC meeting September 17-18.

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 now there are signs that the market will make  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 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.

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

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.

Please share your comments below this post.

Initial Claims Seasonal Adjustment Off Track
Initial Claims Seasonal Adjustment Off Track – Click to enlarge

 

Initial Unemployment Claims Long View - Click to enlarge
Initial Unemployment Claims Long View – 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 was at the low end of the historical range.

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

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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1 Comment

  1. Mike Morgan

    The problem is they are not reporting the number of people who are still unemployed that can no longer collect unemployment benefits.they are only reporting the number of new unemployment signers so there numbers mean nothing.n

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