Investing for Sustainable Gains

DOLETA reports 414,657 actual unemployment claims for the week ending April 3, and puts that at 460,000 seasonally adjusted, an increase of 18,000 from the prior week. The media spin on this is negative. BUT… As shown below, this is actually a very favorable weekly claims report.  Last week the claims number was 41% of the way up from the low values of 2006-2007 to the high value of 2009 *for this week*; this week it is only 31% of the way up. The claims data continue to trend towards the “healthy” market level.

I do not know where the Department of Labor gets its seasonal adjustment factors from, but the fact is that there was a surge in claims during this time of year (an increase of about 30,000, generally this exact week, sometimes 1 week earlier) in each of the past 4 years.  Their seasonal adjustment factor doesn’t seem to be filtering that out correctly.

Related Links and The Chart:

Department of Labor Weekly Unemployment Claims for Week Ending April 3
Calculated Risk

Hoocoodanode (Calculated Risk Comment Thread)

Per a Bloomberg article , a “Labor Department analyst” (don’t these people have names?) reportedly said something to the effect that (don’t these people get direct quotes?): “Easter is a particularly “difficult” to adjust for seasonal factors because it’s a floating holiday that doesn’t come at the same time each year, the government analyst said. Additionally, a state holiday in California on March 31 also complicated the tabulation of the data, he said.”

I think the chart above is pretty clear and doesn’t need much media obfuscation!

The last two weeks of unemployment claims data have shown not only the usual seasonal lull in new claims, but also shown a trend downward.  We are still far from a healthy employment market.  If the current downward trend continues at the current rate, we might expect a healthy employment market, with meaningful jobs growth, by the end of the year.  (This is an extrapolation of the current trend in the “Claims Oscillator” on the chart below.)  On the other hand, with Congressional stimulus and Federal Reserve credit injections waning, banks still crippled, and few strong growth industries…

As previously mentioned, I’ve run the claims chart for the time period from 1998-2005 (before-during-after the dot-com recession). Comparing the dot-com chart with the current chart (see both charts below) shows:

• The dot-com equivalent of the current year is 2004. Claims rose in 2001-2 and were max for most of the first half of 2003, just as they rose in 2007-8 and were max in 2009.
• The claims during the dot-com bust were far lower than the current bust.
• In fact, for this time of year, the current 2010 claims (well over 400,000) are noticeably worse than any part of the 2001-2003 employment bust (clearly under 400,000).
• The same “partial recovery” pattern was seen in both 2004 and 2010:  Claims in 2010 have not yet normalized, and are typically about midway between the preceding “boom” and “bust” levels - corresponding to a “Claims Oscillator” of 50% - about the same as in 2004.

What we have today is this…

… as compared to this …

Today’s claims data showed continued failure of the labor market to “normalize”.

Update Feb. 18: similar chart as last week, but the new “Job Engine Oscillator” has been added… This ranges from 0 to 100%, with 100% being a strong economy - claims at a minimum (for a given week) within the data on the chart, and 0% being a terrible economy - claims at a maximum (for a given week)…  This week’s data shows a drop in the Oscillator and a weakening of claims. Making matters worse, one wonders whether the claims last week may have been impacted by the East Coast blizzard.

The weekly unemployment claims data is looking a bit better than in early January, but it still sits midway between the “healthy economy” levels and last year’s “panic” levels.  This doesn’t feel like a recovery. I will try getting the equivalent data from the 2000-2005 period for comparison..

The claims data remain quite weak. Although this week’s claims were lower than last week’s, that’s just the seasonal pattern. The problem is that the three points for 2010 are only slightly better than the data from the same three weeks in 2009. The 2009 data were horrifying, and the 2010 data are too close to the 2009 data, and too far from the 2006-2008 “healthy job market”, and nowhere near indicating “recession over”.

Update: In late 2009 the data started returning to the “healthy” 2006-2007 levels, but that trend seems to have reversed. In fact, if things continue we might see 2010 data <i>worse</i> than the 2009 data.  (But I hope this doesn’t happen!)

Click on chart for larger version:

This does not look good!  The second week of January is now tracking much closer to 2009 (red) and not returning to the 2006-2008 levels.

I’ve had this unscratchable itch after reading CR’s post about the labor force participation rate decline.  I wanted to know how labor force was defined (in the U.S., it’s everyone 16 and up minus students and a bunch of other exceptions), and whether the declining participation was related to the boomers hitting retirement age (or at least, early-retirement age), as opposed to their kids maybe not being so numerous to make up the difference.  At first glance, not so…  I went over to Wikipedia and found the population pyramid from the 2000 census data, which showed that the generational cohort currently entering the workforce is larger in number than the boomers.  Also, only the leading edge of the boomer population is in the 55-64 age group now, where early retirement might make sense for large numbers.

So I went looking for more information.  The BLS has a very nice economist named Mitra Toossi, who publishes reports every couple of years analyzing the labor force.

The most recent report (PDF alert) came out in November 2009.  Not too far back!  It says, on the first page, “the aging of the labor force will dramatically lower the overall labor force participation rate and the growth of the labor force”.  

I can see this.  The population aged 65+ is getting larger compared to the population aged 16+.  And those over 64 are less likely to be labor force participants.  Similarly, the population aged 55-64 is “booming” right now, and they are also less likely to be labor force participants (e.g. kids thru college and house paid off, so a lot of folks have more choices about whether or not to work…)

But then I ask myself, how much of this is “prediction” and how much is rear-view-mirror economythics?

So I open up the same report but from November 2007 (the previous version).  It says “BLS projects that the labor force participation rate will be 65.5% in 2016.”  That’s a no-growth prediction from the rate prevailing in 2007.  The all-time high was 67.1% in 1997 (or 67.3% in 1999-2000 if you look at their data (possibly revised since 2007)… The participation rate dropped to about 65.5% in 2004 after the dot-com recession.

More from the article:  “projected continuation of the decrease in the labor force participation rate of youths…”

“once the baby boomers exit the last years of the prime age group and enter the 55-and-over group, with participation rates roughly half that of the prime age group, the overall labor force participation rate will decline significantly…”

So it seems that some of this “labor force participation decline” was anticipated prior to the recession, and it’s just demographics.  If the marginal benefit from working is reduced (lower pay, less pleasant work environment), some folks who don’t HAVE to work right now, will wait for a better chance later.

On the other hand, given that the decline in participation was forecast years in advance, shouldn’t policymakers have anticipated a deeper recession that normal just from the workforce demographics?  And perhaps more importantly going forward, since we know the boomers are going to be retiring en masse over the next few years (many with their belts fully tightened by the recession) doesn’t this imply a very weak recovery?  If workforce participation is going to be declining even in good times, the number of willing workers will be suppressed, and might even decline outright, even if total population remains stable to slightly increasing.  (It doesn’t help that the 2000s were a weak decade for population growth, with no sign of improvement, either.)  After all, it’s a mathematical identity that GDP is the product of the size of the workforce, the hours per worker, and the productivity per worker…  Size has some headroom due to layoffs, but not as much as it would if population were booming.  Hours are stagnant and honest-work productivity may be plateauing due to computer technology reaching the saturation point…  All of which points to weak growth in the U.S. for a while, which is not bullish for optimistic P/E multiples in the stock market.  Nor for bond default and/or rollover risks, with a lot of bond issuance predicated on perpetual-growth thinking…

Ruh-Roh!  The economy may have had “enough!”

W.S.

There are long-running debates about how best to evaluate the weekly Initial Unemployment Claims data. Here I present the data from 2006 on, without any “seasonal adjustment” massaging. By giving each year its own color, the graph below enables each week in one year to be easily compared with the similar data from other years. (”Seasonal adjustments”, in addition to being less transparent, also tend to give inaccurate results at economic turning points and duringrecessions, when the labor market behaves differently than during normal growth.)

Viewing the graph, the Weekly Claims data for 2006 (purple) and 2007 (green) are quite similar, and show the “growing economy” pattern. Claims stay near or below 300,000, except for seasonal spikes in mid-July, late November (Thanksgiving), and at the calendar year boundary from late December into January.

The Great Recession is visible starting in early 2008 (blue), with the 2008 data consistently running above the 2007 data.  The deep crisis of late 2008, with claims above 600,000 during the calendar year boundary, continues into early 2009 (red). Claims remained high throughout 2009, and are still high as seen by the first week of 2010 (black).

The most recent claims data, a preliminary number for the week ended January 2, sits about midway between the early 2009 “panic” level, and the 2006-2008 “healthy economy” level, and is comparable to the “worst” levels of the 1990-1991 and 2000-2001 recessions.

So is the economy “getting healthier”, or “still sick, just not dying”?  Perhaps only time will tell.  But for a real recovery, I suspect what will be needed are not only fewer unemployment claims, but more highly productive jobs.

The graph shows the Weekly Initial Unemployment Claims, Non-seasonally adjusted, from the Department of Labor.

Claims have remained elevated since the market panic last fall.  There was a “green shoots” trend up until June, but in fact claims are now trending up again in July 2009.

Similar brief surges are notable in the data for July 2007 and July 2008, so there may be some basis for believing that the current surge is only a seasonal transient.  But these are not normal economic times, and the seasonal adjustment process is correspondingly less useful.  The reader is encouraged to judge for him- or herself the significance of the current numbers.