Bullish Claims Data (Seriously!) Trumped by Europe, Manufacturing

Although an above-expectations headline number and upward revisions to the prior week’s data may have had a negative impact on market sentiment this morning, the internals of last week’s initial unemployment insurance claims actually look pretty good.

The unadjusted four-week moving average has declined 14.4% year-over-year, and fallen through the lows of late 2010 and early 2011, all bullish signs.

The seasonally-adjusted number (the blue line in the chart above) is a bit more worrisome, as it is still above its 2011 lows. However, as we’ve previously noted, the seasonal adjustments seem a bit shaky judging by the increasing volatility and magnitude of the adjustment factors used by BLS:

It’s also comforting to see that the current data are much more benign that in 2007-2008, when the usual seasonal peaks and troughs displayed an unmistakable rising pattern:

However, it’s important to note that current levels are still well above those that prevailed prior to the last recession, and that claims don’t always provide a leading signal of recession, as shown in the following chart (they were relatively tame prior to the 1973 and 1981 recessions).

What good news there was in the claims report was swamped by continuing financial stresses in Europe that are impacting the entire world, a CPI inflation reading that came in a bit hot, and a horrific manufacturing survey.

Core Europe’s policymakers continue to dither while the European Central Bank half-heartedly backstops its financial system. That the most concrete proposal from the recent meeting between Sarkozy and Merkel was a financial transactions tax is truly astounding.

If only we could make mainstream economists and policymakers appear before the public as they truly are, chanting bizarre incantations to nonexistent gods; we might then be able to make some progress on public understanding of fiscal and monetary policy. But as things stand, conditions will have to get much worse before anyone with sufficient power and influence is willing to acknowledge their cumulative errors and change their paradigm. In the meantime, expect ongoing tremors and a full-blown recession on the continent.

On CPI, there are serious problems with it and similar inflation measures (they overstate it, contrary to what most of my fellow critics believe). But there may be some concern that this ties the Fed’s hands as far as further “easing” goes (whether the Fed actually eased with QE2, as opposed to just fueling speculative portfolio shifts, is open to question).

And the Philadelphia Federal Reserve’s manufacturing survey came in at a dreadful, contractionary level that strongly supports our recession call. It severely undermines the positive ISM report from Tuesday, and supports the argument that manufacturing appears to be moving from a global slowdown to a global contraction. Note that the current activity index fell well below the 2010 lows, and is approaching the lows from the depths of the 2007-2009 recession:

Bottom line is that we expect markets and asset prices to continue to be subjected to rising risk aversion and falling complacency as more people finally come around to the fact that recession is a near certainty in the quarters ahead, and may already be occurring in parts of the world.

There were some mildly bullish ideas being floated by the White House this morning on infrastructure investment, but it’s the same old J. Wellington Wimpy stuff that will do very little to reverse long-term trajectories, and worse, they were coupled with promises of more substantial deficit cuts.

As we said in a recent client letter, we wish there were more reasons for optimism and bullishness, but there are very, very few at the moment.

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Other Links to this Post

1. Symmetry Capital Management, LLC » Initial Claims: Still Dovish? — August 25, 2011 @ 3:43 pm