Initial Claims Show Steady Economic Growth With A 7% Decline from Year Ago

Courtesy of Lee Adler of the Wall Street Examiner

This report is an excerpt from the permanent Employment Charts page, updated when new data becomes available.

The Labor Department reported that the seasonally adjusted (SA) representation of first time claims for unemployment rose by 10,000 to 372,000 from a revised 362,000 (was 350,000) in the advance report for the week ended December 29, 2012. The number was worse than the consensus median estimate of 365,000 reported by Briefing.com in a survey of economists. Bloomberg reported a median estimate of 360,000. Dow Jones, which uses Econoday, had the consensus at 363,000. As usually, everybody was wrong., thanks to the seasonal adjustment process which attempts to represent data that is extremely volatile as an idealized smoothed curve.

The headline seasonally adjusted data is the only data the media reports but the Department of Labor (DOL) also reports the not seasonally adjusted data. That data was actually slightly better than average for the last week of the year. The DOL said in today’s press release, “The advance number of actual initial claims under state programs, unadjusted, totaled 495,588 in the week ending December 29, an increase of 40,459 from the previous week. There were 540,057 initial claims in the comparable week in 2011.” [Added emphasis mine] The year to year decline was at the rate of -7.3%. In the prior week the year to year rate of decline was -11.2%.

Immediately after Superstorm Sandy, there was an extraordinary increase in the data going against a persistent 3 year trend of improvement. That was largely reversed in the week ended November 17. For the next several weeks the rate of year to year improvement slowed. While this may have been partly due to the aftereffects of the storm, it also appeared to be part of a trend of slightly slowing improvement that has been underway since 2011. This week’s rate of change was within both that channel and a larger channel going back to 2010. That followed the best year to year rate of change since May in the previous week that was also among the best performances of the past two years.

Note: The DOL specifically warns that this is an advance number and states that not seasonally adjusted numbers are the actual number of claimants from summed state claims data. The advance number is virtually always adjusted upward the following week because interstate claims from many states are not included in the advance number. The final number is usually 2,000 to 4,000 higher than the advance estimate. I adjust for this in analyzing the data.

Normally the increase between the advance number and the final number the following week has been around 2,000-4,000. Last week it was much larger at about 15,000, probably due to weather related reporting delays. I adjusted this week’s reported number up by 5,000. The adjusted number that I used in the data calculations is 501,000, rounded. On this basis, the year to year decrease in initial claims was approximately -39,000 or -7.3% versus a drop of 11.2% last week.

Note: To avoid the confusion inherent in the fictitious SA data, I analyze the actual numbers of claims (NSA). 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 week to week change of an increase of 45,000 was slightly better than usual for the last weekly report in December. Over the previous 10 years the comparable week has virtually always had big increases. The average change for the 10 years from 2002 to 2011 was an increase of approximately 63,000. Last year claims increased by 42,000 in that week. The last week of 2010 had an increase of 53,000. This year was better than 6 of the past 10 years. It wasn’t a blockbuster, but it wasn’t bad, especially given the strong performance the week before. Often there’s a big giveback after an exceptionally strong week. That was not the case this year.

From mid 2010 through mid October 2012 the annual rate of change in initial claims had ranged from -3% to -20% every week, with a couple of temporary minor exceptions, including the Superstorm Sandy surge. Since mid 2011 the annual rate of change was within a couple of percent of -10% in most weeks. The trend was remarkably consistent.

A second trend has become visible on the annual rate of change graph (bottom of chart below). It shows a channel of slightly higher lows and higher highs indicating a slowing rate of improvement as the trend moved toward zero year to year change. The December 8th week’s annual rate of change at -1.2% was at the upper limit of that channel. The current weekly reading of -7.3% is back within the channel and also within the overall range of the past 2 years. The improving trend continues, although the pace in the second half of 2012 has been a little slower than from 2010 through April 2012. It will be interesting to see if the Fed’s more aggressive money printing in 2013 will impact that trend.

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). The chart below now suggests that the market trend will be overbought at approximately 1500, assuming that the trend in claims remains relatively constant. The question is whether additional Fed money printing will cause those trends to tilt more steeply upward.

The expansion of QE now means that the Fed’s balance sheet will now grow by a 38% annual rate sending lots of cash toward and through the market with some of it trickling into the economy for the duration of the program. When the market became extended relative to the unemployment claims trend in 2011, the Fed was simultaneously ending QE2, thus starving the monster of its lifeblood. As a result the market pulled back sharply after reaching the top of the channel This year, the Fed is intent on fattening the bull. That would allow the S&P to bump along the top of the channel as long as the jobs trend stays intact.

Some bubble jobs will likely be created in the process. However, the inflation that should accompany the money printing, whether in asset prices, commodities, or in consumer prices, should eventually force the Fed to stop QE. At that point the markets and economy will deal with the hangover from the program.

[I cover the technical side of the market in the Professional Edition Daily Market Updates .]

Initial Unemployment Claims and Stock Prices- Click to enlarge

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