Headline unemployment claims looked pretty rosy at a seasonally adjusted 388,000, which brought the four week moving average down by 8% since last week. However, non-seasonally adjusted claims broke through 500,000 for the first time since February 2010, with the four week average increasing by nearly 5% over last week. Ouch.
As we’ve pointed out previously, the seasonally adjusted (“SA”) and non-seasonally adjusted (“NSA”) data continue to paint very different pictures of the labor market, and the divergence is evident in the following two charts. Simple linear trend models of the seasonally adjusted data project a steady decline in claims into the first quarter of 2011 (good!), while the same models applied to the unadjusted data forecast a steep rise in first quarter claims (not good!):
Assuming the statisticians at the Bureau of Labor Services are doing their jobs well, we should place more confidence in the seasonally adjusted figures, but not blind faith. Looking more closely at the raw data, the seasonal pattern in layoffs is readily apparent, demonstrating an almost EKG-like regularity. The four week moving average of unadjusted initial claims tends to decline sharply in February and August of every year. As long as that pattern remains relatively intact, we should be able to accept the BLS seasonal adjustments at face value.
However, when comparing the past year to the last ten years of data, it’s clear that the second half decline was not nearly as pronounced this time around, and our statistical testing found a fairly significant difference between the average change in August 2010 and the average change from every August over 2000-2009. That would be cause for concern, except that there was also an unusually steep decline in early May. So despite an apparent breakdown in the regularity of the raw data, unadjusted claims for the year don’t look like they’ve broken too hard with past experience.
A shorter timeline shows even more clearly that with the declines in both Q2 and Q3 taken into account, the raw data doesn’t look quite so bad:
Thus, while the claims data continues to paint a mixed picture, we expect that the February 2011 data could help us discern an underlying trend more clearly. If we see the normally steep seasonal drop in claims, that would be a positive sign for labor markets. If it’s shallower than expected, it would imply that structural factors deserve a closer look, and that the labor market recovery could remain notably subpar.
Regarding structural factors, we decided to take a closer look at the seasonal adjustment factors used by the BLS. At this point, we’re not sure if we’re seeing a statistical artifact or a significant shift in labor market dynamics, but the adjustment factors have been far more volatile since 1989. While this chart exaggerates the difference because of the shortened range of values on the vertical axis, the standard deviation of the average annual adjustment factors is 1.5 times higher in the post-1988 period:
We’re not sure what significance this has, if any, but at the very least, the lower adjustment factors in recent years imply that the BLS isn’t padding the numbers, as a lower number makes the seasonally adjusted figures look worse, not better. Any additional insights from readers are welcomed and appreciated.
In conclusion, the most important takeaway for investors is that the long term trend in non-seasonally adjusted initial claims is still down–the rate of increase, though still positive, has been falling since January 2010, which tends to be bullish for risky assets (though we are cautious in the short term, as valuations and sentiment have become somewhat stretched, and political risks abound globally). The most important takeaway from an economic standpoint is that despite continuing improvement, the labor market recovery is still slow and shallow, and that’s despite the double digit federal deficits of 2010 and 2011 (as we continue to point out, things could get worse in a hurry if policymakers overdo it on fiscal austerity–that’s a key risk in 2011 and the years beyond).
This confirms that the dynamic plaguing this recovery (not to mention the country for the last couple of decades) remains intact: stagnating median incomes alongside financial asset appreciation and healthy returns to the owners and managers of capital.
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