What Does It Mean for Stocks?
The Labor Department reported that seasonally adjusted (SA) first time claims for unemployment rose by 78,000 to 439,000 from a revised 361,000 (was 355,000) in the advance report for the week ended November 10, 2012. The number was far worse than the consensus estimate of 388,000. This was the first week in which those who lost jobs in the Northeast due to Superstorm Sandy were able to file claims. The storm had a big impact.
Along with the headline seasonally adjusted data, which is the only data the media reports, the Department of Labor (DOL) reports the not seasonally adjusted data. It said in today’s press release, “The advance number of actual initial claims under state programs, unadjusted, totaled 466,348 in the week ending November 10, an increase of 104,548 from the previous week. There were 363,016 initial claims in the comparable week in 2011.” [Added emphasis mine]
This is an extraordinary increase, several multiples of the typical year to year change for the past several years, as well as being in the opposite direction of a persistent 3 year trend. Were it not for the storm hitting the most heavily populated region of the US, today’s number would be deeply alarming. The storm’s impacts should be seen in the numbers for at least several weeks. It will be virtually impossible to extract the underlying trend during that time. We are in uncharted waters, as the charts below illustrate.
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.
Lately the increase between the advance number and the final number the following week has been around 2,500-4,000. Last week it was 7,000, again due to the storm. I therefore adjusted this week’s number up by 4,000, the top of the usual range. The adjusted number that I used in the data calculations is 470,000, rounded. On this basis, the year to year increase in initial claims was approximately 108,000 or nearly 30%.
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.
Over the prior 10 years, the second week of November has mostly had large decreases in claims. The only exceptions were the recession years of 2007 and 2008, which had big increases. The average change for the 10 years from 2002 to 2011 was a decline of approximately 9,000. The range was +73,000 to -56,000. Last year had a decrease of nearly 40,000 and 2010 saw a drop of 43,000. This year’s increase of 108,000 was not only an outlier, but a huge reversal of the 3 year trend. Last week I wrote that we should expect an increase in claims from delayed filings and storm related job losses and that that could be offset as time progresses by new jobs created by cleanup, recovery, and rebuilding from the storm. That recovery will start from a huge hole.
Considering that the trend has until now been remarkably consistent and that this week showed initial claims declining by around 40,000 in each of the last two years, the jump last week suggests storm related losses in the vicinity of 150,000 jobs. The question will be how many of these will be permanent. If the number of permanent job losses is significant, the unemployment compensation costs would be budget busters for the states of New York and New Jersey. New York just announced that it was asking for $30 billion in disaster assistance funds from the Federal Government.
The annual rate of change in initial claims has ranged from -3% to -20% every week since mid 2010, with a couple of temporary minor exceptions. Since mid 2011 the annual rate of change has been within a couple of percent of -10% in most weeks. The trend has been remarkably consistent. Trips outside the range have been rare, and have been due to statistical calendar aberrations rather than any “facts on the ground.” This week’s change of +30% sticks out like a sore thumb on the chart. It may take several months before we see where the underlying trend actually lies.
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 has suggested for a while that as long as the trend in claims is intact, the S&P would be overbought at approximately 1450, and oversold at roughly 1220. On that basis it became overbought in mid September.
The market has pulled back since then, but whether it’s headed all the way to 1200 is doubtful, given that the Fed’s QE 3 purchases began to settle just this week. If the program continues at its current rate it will grow the Fed’s balance sheet by 20% and send lets of cash toward the market over the next 12 months. The FOMC October meeting minutes suggest that the Fed will expand QE. I expect it also to attempt to paper over the Fiscal Cliff just as it did with Y2K. That papering episode helped to trigger the final blowoff of the internet bubble in Q1 2000. If no “Grand Bargain” is reached on the Fiscal Cliff (I prefer to call it the Fiscal Dawn), I expect Fed policy and the result to rhyme with Y2K in Q1 of 2013.
For more charts and discussion on this topic visit the permanent Employment Charts page from which this report is excerpted. That page is updated whenever new data becomes available. You can bookmark it for future reference.
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Source: Wall Street Examiner
