Initial Unemployment Claims Improving But Suggest Stock Market Nearing Overbought Level

Courtesy of Lee Adler of the Wall Street Examiner

This report is an excerpt from the employment data permanent charts page, updated when new data becomes available. Bookmark it for future reference.

The Labor Department reported that seasonally adjusted (SA) first time claims for unemployment fell by 6,000 to 361,000 in the advance report for the week ended August 4. The “drop” was “unexpected” according to media reports. It should not have been.

Actual claims, Not Seasonally Adjusted, (NSA-the actual total of individual state counts submitted to the Department of Labor) were 321,000 (rounded) including  the addition of 3,000 claims to adjust for incomplete state counts that do not include interstate claims at the time of  the advance release. This week was better than the week ended August 6, 2011 when new claims totaled 354,000. The current week was also better than the average of the last 10 years’ claims for this week of 340,000. Approximately 34,000 (9.5%) fewer people filed first time claims this year than in the same week in 2011. On a week to week basis, claims rose by 8,000.

The NSA year to year change from the same week last year was a decline of 9.5%. Applying that percentage increase to the SA claims number of 399,000 for the same week in 2011, the current SA number would be 361,000, which is what was reported. That’s a coincidence.  Unlike most weeks, the SA number was right where it should have been based on the year to year percentage decline in actual claims counted. Usually, both the total and the change are false. The seasonal adjustment process applied to weekly data is the problem (False Claims and Absurdities of Mainstream Media Reports On Initial Unemployment Claims).

To avoid the confusion inherent in the  fictitious SA data, I ignore it and analyze the actual numbers of claims as counted. Its a simple matter to extract the trend from the actual data (NSA) 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. Looking at that graphically it’s easy to see whether the trend is accelerating, decelerating, or about the same. This week it’s about the same.

This week’s data continues to be consistent with the improving trend of the past two years. It is entirely consistent with the normal weekly fluctuations in the rate of change from -3% to -20% that have occurred since mid 2010. Since mid 2011, in most weeks the annual rate of change has been within a couple of percent of -10%.  The trend has been remarkably consistent.

How is it that the pundits can be surprised so often? Easy. They are looking at bad data–the SA data.  Seasonal adjustment factors for this week have varied over the last 10 years  from 1.126 to 1.201. The range of variance is 7%. That’s not as bad as many weeks when the variance is as much as 20%. This week’s factor was 1.137.

Initial Unemployment Claims Seasonal Adjustment Factors - Click to enlarge

Initial Unemployment Claims Seasonal Adjustment Factors – Click to enlarge

Looking back 10 years, the current week has usually shown an increase in claims.  The current week to week increase was 8,000 (rounded). That compares with a prior 10 year average of 11,000 for the week. Last year claims rose by 13,000, and in 2010 they rose  by 22,000 during the same week. The current numbers are better than the past couple of years, and better than the 10 year average.

This week’s data shows that the trend is still improving (chart below). The rate of improvement is slightly slower than mid 2010 to mid 2011, but the slope of the year to year line for this week is declining at approximately the same rate than the slower 52 week moving average suggesting no shift in the rate of change over the past year.

The consistency is easy to see in the annual rate of change graph. The annual rate of decrease in new claims continues to oscillate around the -10% axis. The latest data was down by 9.5% which is near the middle of the rate of change over the past 2 years. Anything between a decline of approximately 3% and 20% year to year suggests that the improving trend is on track. So far, the Fed has no reason for additional QE (more in depth analysis in the Professional Edition Fed Report). Only if the rate of decrease drops to less than 2.8% would the Fed have greater impetus to move .

Initial Unemployment Claims - Click to enlarge

Initial Unemployment Claims – Click to enlarge

 

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 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.) This chart suggests that as long as this trend in claims is intact, the S&P would be overbought at approximately 1450, and oversold at roughly 1200.  The market is approaching the overbought parameter. I cover the technical side of the market in the Professional Edition Daily Market Updates.

Initial Unemployment Claims and Stock Prices - Click to enlarge

Initial Unemployment Claims and Stock Prices- Click to enlarge

As the number of workers eligible for unemployment compensation has trended up since 2009, the percentage of workers filing first time claims has continued to decline. Comparing the current week yearly line to the 52 week moving average, the trend of improvement continues to track at a steady rate, just minimally slower than in 2011. The current level is near the level of 2004, the last non bubble “normal” year. By this standard, the current level of claims is “normal.”

Initial Unemployment Claims Percentage of Total Employed - Click to enlarge

Initial Unemployment Claims Percentage of Total Employed – Click to enlarge

 

The chart below gives a longer term perspective on claims. The trend has been improving while remaining above the bubble years with their 10 million fake jobs taking orders for new and unneeded condos and houses, building them, permitting and inspecting them, and taking and processing mortgage applications.

Lately, economists have been arguing about the “natural” unemployment rate. I think we’re at it now. If we recognize that the bubble period with its millions of fake jobs was abnormal, then the low level of claims during those years was also abnormal. Where we are today is probably normal and the expectation that the US will ever get back to 6% unemployment is a false hope.

Initial Unemployment Claims Long View - Click to enlarge

Initial Unemployment Claims Long View – Click to enlarge

 

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