Initial Jobless Claims Improve But Distortions May Be In Play

By Rom Badilla, CFA

October 11, 2012

The number of people filing for unemployment benefits unexpectedly fell suggesting possible distortion in the data. According to the Department of Labor, Initial Jobless Claims for the week ending October 4 came in at 339,000 individuals, which is a decline of 30,000 from the previously revised prior period and the largest drop since late July. Market participants were surprised since expectations were for 370,000 out of work individuals based off of the median of economists’ forecasts.

While the drop in filings for unemployment benefits is a positive development for the labor markets, there is concern that this may only be temporary given the statements from the Department of Labor. As a result, the data may be distorted according to Deutsche Banks’ Chief Economist, Joseph LaVorgna. In their latest U.S. Data Flash, he wrote the following:

It is possible that the data are currently being distorted again as according to statements from the DoL, the decline was largely attributed to one state. Hence, we are likely to get a significant payback next week. Absent this statistical distortion, we estimate claims remain around the 365k level, which is still close to the low end of the range for the year.

In addition to the potential “payback”, next week’s report will show the breakdown by state of this week’s data.

The latest release pushes down the four –week moving average to 364,000 individuals from 376,000.

Initial Jobless Claims 4-Week Average & Recessions

An average is used to smooth out the week to week volatility and is a gauge of the overall health of the jobs market and the economy. A four-week moving average of greater than 400,000 is typically associated with job destruction and a rising Unemployment Rate and falling Non-Farm Payrolls. With slack in the jobs market and the potential for slower economic growth, stocks should fall while bond prices should rally (bond yields decline). Conversely, a moving average in the 300,000 to 350,000 range coincides with job growth and improving economic prospects. This should equate to higher stocks and declining bond prices (bond yields increase).

Given the fact that much of this week’s decline is concentrated in one state and thus not likely a reflection of the jobs market of the entire country, the risk is for a reversal in next week’s data where Initial Jobless Claims increases. If that is indeed the case, then this should coincide with more lackluster improvements in the jobs market and more of the same in Non-Farm Payrolls growth and a sticky Unemployment Rate. As a result, this should keep interest rates relatively low for the foreseeable future.

According to Trade Monster’s Bond Trading Center, the yield on the 10-Year U.S. Treasury stands at 1.72%, up 5 basis points from yesterday.

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