Unemployment Insurance Claims and Challenger Layoffs

One of the indicators that the financial press uses to gauge the U.S. job market is unemployment insurance claims. The data, compiled weekly by the U.S. Department of Labor, tracks how many new people have filed for unemployment benefits in the previous week. Since the weekly data can be quite volatile, the 4-week moving average is typically monitored.

Today’s report showed that jobless claims inched down by 1,000 last week to 404,000, while the 4-week average fell by 7,000 to stand at 408,000, marking the lowest level since mid-August. Initial unemployment claims saw a sharp decline after reaching the 650,000 mark in March 2009; however, since late 2010, they have been stubbornly stuck in the 400,000-450,000 range. Claims usually fall near the 300,000 level in periods of rapid economic growth, while it is commonly said that a level near 375,000 is necessary just to keep up with population growth without increasing the unemployment rate.

Our research indicates that the Challenger layoff survey may be a good leading indicator for unemployment insurance claims. The data, compiled monthly by the consulting firm Challenger, Gray & Christmas, provides information on the number of announced layoffs by U.S. corporations. Commonsensically, once the announced layoffs are executed, the laid-off workers will need to apply for unemployment benefits. Our study indicates that the pass-through time is around 8 weeks. In this context, the recent spike in the Challenger layoff survey is certainly worrisome. According to the survey, the number of planned layoffs in September amounted to 115,730, the highest in more than two years and more than double August’s total of 51,114. If the correlation we estimated between the Challenger survey and unemployment claims since 1999 holds, then we may see a spike in unemployment claims over the next few weeks. Lastly, it is worth noting Challenger’s comment that September’s increase in planned layoffs was not “directly related to recent softness in the economy.”

If they say so…

Employment Gains Continue

With recent economic data turning decidedly mixed, raising concerns about the possibility of another economic slowdown similar to the one experienced last spring and summer, it was encouraging to see the monthly employment report released this morning surpass expectations.

Total nonfarm payrolls grew by 244,000 in April, handily beating expectations for a lesser gain of 185,000. Private payrolls turned in an even better performance, expanding by 268,000, which was well ahead of estimates of a 200,000 job increase. Private payrolls are now at their highest level since March of 2006.

While it’s encouraging to see employment continuing to achieve steady, although still somewhat lackluster, progress, we also need to keep a close eye on leading economic indicators, some of which have suddenly stalled a bit. But overall, today’s report was good news, as increased hiring should be a key factor in bolstering consumer spending and extending the current expansion.

Conflicting Labor Reports

This Friday we’ll get another addition of the monthly employment report produced by the Bureau of Labor Statistics that is heavily scrutinized by investors trying to gauge the pulse of whether the economy is improving or not. But the government’s report isn’t the only jobs barometer that investors watch, and today brought two employment updates from the private sector that issued diverging signals.

First up was the Challenger/Grey Report, which tracks the number of corporate layoffs, and is known to be one of the few employment reports that is free of seasonal biases. Today’s report showed that February’s planned firings increased 20% on a year over year basis, with federal, state and local governments leading the charge. This is not great news, and with all the focus on budgetary problems at the state and federal level, perhaps this is a warning of building pressure in that part of the labor market.

The other report out today was the ADP National Employment Report that is constructed using actual payroll data. The estimate for today was an increase of approximately 180,000 jobs, but the number came in better than expectations at 217,000.

Our view on jobs at Pinnacle has been that jobs are in the middle of a slow structural repair phase, but that the cyclical profile is improving. I don’t think today’s data changes anything to that outlook, but we’ll have to keep a close on the Challenger/Grey data to make sure that one month of data doesn’t develop into a malignant trend.

Will the ADP Translate, and Will it Matter?

Yesterday the ADP employment report surprised sharply to the upside when it reported a December employment gain of 297,000 jobs, versus an estimate of 100,000. That was certainly good news, and it may just be confirming some of the positive trends that we’ve seen lately in such things as unemployment insurance claims, the Conference Board’s Employment Trends index, and average hours in the workweek.

As always happens, the bulls have trumpeted this news, and the bears pick away at the details of the report. Tomorrow will bring the over-hyped monthly payroll report, and market watchers will focus on the unemployment rate, and total nonfarm payroll jobs created. The consensus is currently for a job gain of 150,000, with 175,000 anticipated out of the private sector (meaning losses from the government sector). Anywhere around the consensus would be encouraging from a cyclical perspective, and it wouldn’t be surprising to see a decent number that coincides with the pickup in the aforementioned trends we’ve been watching. But there is no use in guessing what the actual number will be since the median difference between estimated and actual is close to 100,000, and any miss within around 100,000 is statistically insignificant anyhow.

What I really wonder about is whether a good number will matter much in the short term. We’ve been monitoring elevating levels of complacency among stock investors lately and worrying that the market might be due for a countertrend correction. Watching the market’s reaction to tomorrow’s payroll report will be as interesting as the number itself. I’m watching to see if a good report is met with selling, which might be an indication that a short term top is in. A bad number followed by buying might be equally interesting and imply that right now even bad news can’t keep this market down, so maybe stretched is about to become ultra-stretched. Tune in tomorrow, it should be an interesting show.

Chart: ADP Employment Report (yardeni.com)

Will the Jobs Show Up?

Yesterday was a great day for risk assets, as markets celebrated better than expected manufacturing numbers out of both the U.S. and China. On the back of an excruciating August for equity markets, it’s hard to tell whether the magnitude of the bounce had more to do with short-term oversold conditions, or if the market is telling us that it has overly discounted the slowdown in global growth that appears to be taking place.

One of the indicators less talked about during the rally yesterday was the ADP employment survey, which declined by 10,000 instead of increasing by the 15,000 that economists expected. We’ve continually written that jobs are very important at this point in the cycle, and that we need to start seeing more robust job creation if the expansion is to extend. Tomorrow we get the monthly payroll report for August. Like last month, the decline in employment of temporary census workers is expected to produce a negative headline number. But the data will be scrutinized excluding census workers, and the current estimate is for an increase of about 40,000 in private payrolls.

Should payrolls surprise to the upside, it would make sense that the markets might rally further. On the other hand, if it is another disappointing report, it wouldn’t be surprising if markets take some of yesterday’s gains right back off the table. But often times market moves have a way of defying commons sense. If it turns out to be a poor number, it will be really interesting to see if the market can shake it off and find a way to rally anyway. If so, we might just be in for a bigger rally. No sense in making any big guesses here, but we’ll be watching closely.

Initial Jobless Claims

Yesterday, we got a one-two punch to help send stocks lower on the session. The first economic data point to hit the street was initial jobless claims. Initial jobless claims measure the actual number of people who have filed for unemployment benefits for the first time (if they have met the five criteria for inclusion). The number came in unexpectedly high at 500,000, which is also a significant psychological number. Below is a chart of the series which comes out weekly. This is the largest number in almost a year and is causing some serious angst among investors as double dip fears rise. Without job creation the largest part of our economy, consumption, is likely to suffer as a result.

Then the second punch came with the release of the Philadelphia Federal Reserve economic index which came in at -7.7%. A positive 7% was expected. This index gauges manufacturing activity in the Tri-State area of Philadelphia and for the first time in over a year the index showed a slowdown. This is not good news if the manufacturing sector, which helped raise the economy from the depths of the recession, is now starting to roll over.

These are only two data points, on one day during the summer doldrums, but it is not a good picture. We were worried about the possibility of continued fundamental deterioration in the economy, and started to position our portfolios accordingly. We will certainly be on the watch for improvements in these numbers but for right now it seems risk is elevated, and we must manage to that.

Is the Job Picture Improving?

Yesterday, the ADP National Employment report, named so because it was created by Automatic Data Processing, measured employment as falling by 169,000 jobs from October to November, on a seasonally adjusted basis. ADP’s report is considered to be a good gauge of what to expect from the Bureau of Labor Statistics’ (BLS) employment report, which is released two days later. November’s drop in the ADP report was the 23rd straight month in which the economy shed jobs; however, it was also the 8th straight month in which jobs cuts were less than the previous month (the low for the series was in March of 2009 with a decline of 736,000). Below is a chart of the monthly change in ADP employment, with the 0 level marked by the red line.

There are two lines of thinking when viewing this chart and job losses. The first would be the bullish case that employment is a lagging indicator, so the recent progress proves that the economy has been improving since the March lows, and very soon the report may show the economy actually gained jobs (many analysts believe that may occur by February 2010). The second line of thinking is the bear case and focuses on the other side of the labor market – hiring. From their point of view, this has been the mother of all jobless recoveries and business hiring has still not shown signs of improvement.

It will be interesting to see how the market reacts to the BLS data tomorrow. If we get a better than expected number (125,000 job losses are expected), then the bull case of improving economic conditions could finally push the S&P 500 above the 1,100 to 1,115 range it has been in for the last two weeks. If the number disappoints, however, it could serve as the catalyst to drive an overbought market lower.

Behind the Numbers – Non-Farm Payrolls and the Net Birth/Death Model

Last Friday’s headline payroll number was a bad one when viewed on an absolute basis, but it was much better number than expectations (-345,000 actual job losses in May vs. -520,000 expected). As one picks through the report, there appears to be a little something for everyone. The bears can hold onto an unemployment rate of 9.4% (with the comprehensive U-6 version over 16%), a workweek that is at all-time lows, average hourly earnings that are at the worst levels since 2005, and a household survey that was even worse than the establishment survey that garnered the headlines. The bulls, on the other hand, should be quick to point out that the jobs number was the best since late last fall, that most components are showing considerably smaller losses than the average for last year, that both March and April losses were revised down (which breaks the downtrend), that temporary and retail employment (which are usually leading in their nature) were up, and that the unemployment rate is always a lagging indicator that will be viewed by markets in the rearview mirror.

One of the oddities buried within the payroll report is something called the CES Net Birth/Death Model. It’s a statistical model that was created to reduce a known source of sampling error within the report. The payroll survey can’t capture on a timely basis changes in employment generated by either new or terminated businesses due to the time lag between businesses being created and destroyed, and the time it takes for them to be included in the survey. To adjust for this flaw, the Bureau of Labor Statistics, which is the government agency responsible for tracking employment data, developed a model to approximate how many new businesses were created (birth) or destroyed (death) each month. The latest report showed 220,000 of these jobs were created during May (see chart below), which is the highest ever in the month of May. Bears and conspiracy theorists have been pointing out that these birth numbers at best fly in the face of common sense, and at worst are an attempt by the government to cover up how bad the job market really is. The bulls would say that for all the quirks and flaws in this report, perhaps the only message that matters is that the labor market appears to be stabilizing along with credit, housing, and the overall economy. There is a saying that that beauty is in the eye of the beholder, and I guess the same is true of the latest employment report…

Source: Bureau of Labor Statistics