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Thursday, August 26, 2010

Initial Claims August 26

Update: The KC Fed survey contradicts my optimism in the rest of this post. The next Chicago PMI will be interesting indeed, as will NACM. End update.

Initial claims dropped to 473,000 compared to last week's initially reported 500,000. However last week's claims were revised up to 504,000. The four-week moving average for initial claims rose to 486,750. That is a bit intimidating.

However I feel more certain about my theory that a good chunk of the rise in these claims are related to education cuts, and thus that initial claims should tend to fall after mid September. Of course my theory could be totally wrong. The nice part is that we have to wait less than a month to find out! In this business, one rarely gets that type of rapid feedback. School calendars vary by almost a month across the country, and so you would expect to see a rise, a fall, and then perhaps a later rise, followed by a fall. And just 20-30K additional initial claims would make these numbers show a significant rise.

Also August's and September's employment reports will show whether most of the chop is coming in government. If it is, that is less of a recession indicator than it would be if the cuts were coming from the private sector.

So far on the freight indicators, trucking has been sagging all summer, but rail is continuing to power through. The rail figure really confirms Chicago PMI, which has held up mightily. For whatever reason, the Philly Fed survey tends to be much more correlated with new home activity, and so I'm slotting that one in as real, but due to another segment effect.

Now having written that, I want to remind everyone of a few less positive factors related to the weekly unemployment claims reports (all of which can be found here by selecting "news release"):
A) We began 2010 with a covered employment base of 130,128,328. The base is figured by using reports from the state payment records, and the base is only updated every few months. The last update was at the beginning of July, and we were down to a base of 126,763,245. In April, the intermediate figure was 129,298,468. This is a lagging indicator, in part because many companies send in these taxes quarterly.

B) Nonetheless, this is very close to the overall figures for BLS' household survey in the employment report. If you look at those figures, they show that the majority of the gains in employment in the March-May segment appeared to be from Census, and they dropped right out again in June and July. YoY, the number of unemployed had not changed in July. This is stressful, because over that same period millions had gone on retirement, which should have shifted the unemployed number down somewhat if all other things had been equal.

C) The numbers for insured unemployment taken YoY demonstrate the painful situation:
Year: 2009............................2010
Initial: 5.7 million....................4.2 million
Ext B: 0.62 million..................0.93 million
EUC: 3.0 million....................4.9 million
Total: 9.3 million..................10.0 million
There are, however, more persons who fell off the insured unemployment wagon and who aren't shown. So like it or not, we cannot discard the initial claims as a pure flier. They may not be indicative of the employment market as a whole (or they may be), but in a labor market which has shown such severe weakness, any additional segment weakness cannot be airily dismissed.

When trying to check confusing indicators, one of the first recourses for any economy is to go to fuel and energy consumption. Like it or not, this is an indicator of overall activity in any economy. And looking at the last crude inventories report (pdf) does not really support the idea that the overall economy is weakening much. It's definitely not booming, but four-week gasoline consumption is up by 3% YoY and diesel consumption is still up 4.9% YoY. Although the growth in diesel demand YoY is much less than reported earlier in the year, in part that is because consumption patterns later in 2009 were higher. You can use these figures to make a case that the economy is sagging slightly from its performance a few months ago, but that is all. One can also argue that efficiency adjustments mean that these numbers indicate that the economy is growing slightly from its activity levels a few months ago.

We certainly do have plenty of petroleum product out there, and end-user prices are sagging because of that.

Another place to check energy consumption is the industrial production report. The last one is for July, and it shows that YoY utility output was up 8.2%, very correlated with the YoY increase in overall production of 7.7%.

Therefore I really don't see, at this time, that there is a strong case for a big contraction in real growth. However, the reality is that real growth has been very constrained over this "recovery" cycle, and a very minor retraction could push us into an additional mild contraction. Because of this, consumer buying power and spending will be all important over the next year.

So next up, incomes, ready money, and retail prospects.


"Therefore I really don't see, at this time, that there is a strong case for a big contraction in real growth."

I think this is going to be an especially important Christmas season and I have very little faith in my ability to predict it.

A good Christmas could generate an optimism feedback loop that could do wonders for the unemployment situation and ultimately the housing market (and unfortunately the price of oil).

A bad Christmas could do the opposite.

My gut puts the odds at 70% good and 30% bad right now. 30% is enough to make me brace for more pain though. If it is bad, the consequences could be psychologically devastating.

I think my TIP fund has fully priced in the good outcome and none of the bad, which makes me a bit uneasy. It is especially vulnerable to deflationary outcomes right now. Although TIPS have some deflation protection, they can lose all of their accumulated inflationary gains.
Mark - Banks are just piling into T-bills, and that's when I get out. Take a look at this and see what you think.

I cannot see that there is a lot more there and it looks deflationary as all hell. Nor can I truly see what the Fed hopes to accomplish by buying T-bills themselves. As it is now, the ridiculously low returns are in effect chasing some money out of the banks. But it sure as heck isn't going into the stock market, is it? Small investors aren't exactly snapping up stocks.

So is it going to mattresses, tinfoil, crack? When it is going to cost a person trying to build a six month savings account money to put the money in a bank, it's probably going to coffee cans. This could explain the significantly higher multi-year trend in domestic firearm acquisition.

If we continue a basically wacky governmental interference strategy, it's quite possible that we could go into a protracted new cycle of contraction, in which case buying more T-bills now would pay off. However, the TIPS seem to me to be pushing it as new buys.

At this time good companies with a history of tight management and significant liquidity and good cashflow are probably going to return you more. You have to do your research, but then you have the time to read.

"I cannot see that there is a lot more there and it looks deflationary as all hell."

I looked within your link. Fascinating.

Shortly after posting my thoughts in my last post on your blog, I decided to liquidate my TIP position in my retirement account and move to cash.

I think that's probably one of the best reasons to have a blog by the way. It forces you to type what you think. Sometimes just reading it back to yourself makes all the difference in the world.

Isn't that something?

I expect it to be a losing trade. However, the measly upside reward does not seem to even remotely match the downside risk.
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