Will The Fed See The Actual Unemployment Claims Data or Only Hear the Sound of the Drumbeat Growing Louder

Courtesy of Lee Adler of the Wall Street Examiner

This report is an excerpt from the permanent employment charts page, which is updated whenever new data becomes available. You can bookmark that page for future reference. This report is a follow up to the post Initial Unemployment Claims Fall By 7,300, which details all of this week’s data released by the Department of Labor. 

The Labor Department reported that seasonally adjusted (SA) first time claims for unemployment rose by 4,000 to 372,000  in the advance report for the week ended August 18, missing the consensus estimate of 365,000.

Actual claims, Not Seasonally Adjusted (NSA-the actual total of individual state counts submitted to the Department of Labor) were 313,000 (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 20, 2011 when new claims totaled 345,000. The current week was also better than the average of the last 10 years’ claims for this week of 319,000. Approximately 32,000 (9.2%) fewer people filed first time claims this year than in the same week in 2011. On a week to week basis, claims fell by 4,000.

To avoid the confusion inherent in the fictitious SA data, I ignore it and analyze the actual numbers of claims as counted by the 50 states from actual claims filed that week, and submitted to the Department of Labor. 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.

Looking back 10 years, the current week has consistently shown a drop in claims.  The current week to week decline was 4,000 (rounded). That compares with a prior 10 year average decline of 11,000 for the week. Last year claims fell by only 1,000, but in 2010 they fell  by 20,000 during the same week. The current numbers are better than last year, but not as good as in 2010 when the market was in a strong rebound from the extremely depressed levels of 2009. This year’s numbers were not as strong as the 10 year average. So this is not a great number, but neither is it inconsistent with the usual trend variance.

As plotted on a chart, this week’s data appears to show that the trend is still improving (chart below). The rate of improvement is slightly slower than from August 2010 to August 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 current year to year decline of 9.2% is still near the middle of the range 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 largely 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 now very near the overbought parameter and, barring a much stronger improvement in the claims data, at greater risk of a correction in coming in the next few months. [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 yearly line for the current week  to the 52 week moving average, the trend of improvement continues to track at a steady rate, slightly slower than in2010 and 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

The punditry consensus estimate missed again this week, as it usually does.  How is it that conomists 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 1.275 to 1.200. The range of variance is over 6%. That’s much less than many weeks when the variance is as much as 20%. This week’s factor was 1.200, the lowest it has been in the 1o years covered by this chart.  (False Claims and Absurdities of Mainstream Media Reports On Initial Unemployment Claims).

Initial Unemployment Claims Seasonal Adjustment Factors - Click to enlarge

Initial Unemployment Claims Seasonal Adjustment Factors – Click to enlarge

The following chart is a picture of reality versus the the Impressionist art of seasonal adjustments. Sometimes the SA data represents reality to some degree, and sometimes it doesn’t. If you are following only The SA data, at any given time you have no way of knowing which it is. One thing is certain– it is not photo-realism.

There are ways to measure trends using actual data. One way is to show the year to year line as of the current and corresponding date, as shown on the chart below, as well as the first four charts above.  Another is to view the annual rate of change as shown in the first chart above.

The arbitrary seasonal adjustment process has often raised false alarms.There were big counter trend pops early in the second half of 2010 and in the second quarter last year. In the July 7 week it gave a false positive reading, which conomists furiously tried to explain away with some nonsense about auto plant shutdown timing, when the explanation was far more mundane. The SA data was just wrong.

The  trend of the SA data often goes off track for months at a time, giving a false picture. The past 4 months have been one of those periods. The trend of the SA data through August 18 has been flat, implying that the trend is no longer improving, while the actual trend has remained down (improving). First time claims are actually doing better than the impression given by the trend of the SA data, which is why conomists are constantly confused.

Initial Claims, Seasonally Manipulated vs. Actual - Click to enlarge

Initial Claims, Seasonally Manipulated vs. Actual – Click to enlarge

The question is whether the Fed will be confused as well, and the answer, considering their past failures to understand the economic data is “probably.” So even though the actual data does not appear to justify more Fed Quantitative Easing, i.e. money printing, the drumbeat for it has grown louder. Rather than seeing the data the Fed may only be hearing the sound of those drums.

 

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