First time unemployment claims continued their strength in late September but that should change radically in the weeks ahead as the effects of the chaos in Washington begin to ripple through the economy. In the short run the data will weaken, but more important will be what happens after the government reaches a deal on the budget and the debt ceiling.
The Labor Department reported that in the week ending September 28, the advance figure for seasonally adjusted initial claims was 308,000, an increase of 1,000 from the previous week’s revised figure of 307,000. The 4-week moving average was 305,000, a decrease of 3,750 from the previous week’s revised average of 308,750. The consensus estimate of economists of 315,000 for the SA headline number was again too high (see footnote 1) as economists remain too pessimistic and apparently not aware of the real-time hard data on Federal Withholding taxes, which I track weekly in the Treasury Update.
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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 252,092 in the week ending September 28, a decrease of 3,018 from the previous week. There were 301,054 initial claims in the comparable week in 2012.” [Added emphasis mine] See footnote 2.
The actual filings last week represented a decrease of 16.3% versus the corresponding week last year. Excluding the two weeks of mid September 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 with a usual range of zero to -20%. Lately it has been consistently strong. Last week it was -16% and this week, -16.3%. Excluding the mid September “glitch” weeks, over the previous 2 months the rate of decline was -10% to -13%. The average weekly year to year improvement of the past 2 years is -8.3%. Claims as a percentage of the total employed have lately been at levels last seen at the end of the housing bubble, just before the market and economy collapsed.
As reported here last week:
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 exaggerated. 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. The two weeks where the glitch supposedly impacted the data were subsequently only revised up by 1,100 and 1,40o, suggesting that the undercounts were insignificant.
I adjusted this week’s reported number up by 1,500 to 252,000 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 3,000 from the previous week. That compares with a drop of also around 3,000 for the comparable week last year. The average change for the comparable week over the prior 10 years was an increase of 2,000. The numbers for this week were slightly better than average.
Federal withholding tax data remains in a growth trend. It was still on trend until the last two days when there was a sharp downtick. It’s too early to tell whether that’s just a blip, but the government shutdown should begin to show up in this week’s data, both in withholding taxes and initial claims.
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 accelerating improvement in spite of the fact that these comparisons are now much tougher than in the early years of the 2009-13 rebound. Given the recent strength in this data, the Fed could have used it as an excuse for tapering QE, but it simply closed its eyes, threw a tantrum, and held tight to its money printing.
The government shutdown will pollute the data for its duration. Let’s take it with a grain of salt while everyone else is crying, rending their clothes, and gnashing their teeth.
Relative to the trends indicated by unemployment claims, stocks have been extended and vulnerable since May. QE has pushed stock prices higher but has done nothing to stimulate jobs growth.
I plot the claims trend on an inverse scale on this chart 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 has kept coming back to life. Has the government shutdown and the potential for default finally put a stake in its heart? 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 at the low end of the historical range.
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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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