Courtesy of Lee Adler of the Wall Street Examiner
The Labor Department reported that seasonally adjusted (SA) first time claims for unemployment rose by 2,000 to 366,000 in the advance report for the week ended August 11, beating the consensus estimate of 368,000.
Actual claims, Not Seasonally Adjusted (NSA-the actual total of individual state counts submitted to the Department of Labor) were 319,000 (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 13, 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 346,000. Approximately 27,000 (7.9%) fewer people filed first time claims this year than in the same week in 2011. On a week to week basis, claims fell by 1,000.
Applying the NSA year to year change of 7.9% to the SA claims number of 408,000 for the same week in 2011, the current SA number would be 376,000, which is 10,000 more than was reported. So as usual, the SA claims number is misleading. The number should be higher to reflect that actual amount of change since last year. 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.
Looking back 10 years, the current week has consistently shown a drop in claims. The current week to week decline was 1,000 (rounded). That compares with a prior 10 year average decline of 16,000 for the week. Last year claims fell by 8,400, and in 2010 they fell by 20,000 during the same week. By these standards the current numbers are worse than the past couple of years, and worse than the 10 year average. At this point, this does not appear to be material, but if it happens again next week it could be a sign of trouble.
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 7.9% 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
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
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
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
The punditry consensus estimate came close this week. That was happenstance. They usually miss by more. 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 1.262 to 1.134. The range of variance is nearly 10%. That’s not as bad as many weeks when the variance is as much as 20%. This week’s factor was 1.159.
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 that 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 shown on this chart, which is to show the year to year line as of the current and corresponding date. 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 when the explanation was 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. As of the August 11 week, the trend of the SA data was sideways for the past 6 months while the actual trend has still be 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
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