Initial Claims Predict Disappointing June Non-Farm Payrolls Of 75K-125K

Tyler Durden's picture

Yesterday's very disappointing initial claims number was quickly forgotten as algorithms latched on to any positively sounding headline out of Europe in order to push the Dow over the mythical 12,000. Alas, this is very shortsighted, because as Bloomberg economist Joseph Brusuelas is quick to point out, based on historically close Claims-NFP correlations, the June NFP number will be a big miss to expectations, and print in the 75-125K range. This ugly number which will merely further cement the case for further monetary or fiscal stimulus (and forget the latter), will come just in time for the Manufacturing ISM to print sub 50, and send the confirmation that we have all been waiting for that the US economy is now officially contracting.

Brusuelas explains why next month's jobs number could be just as ugly as the massively disappointing May NFP:

While U.S. initial jobless claims seem to be resuming their gradual trend downwards, the current level suggests another weak month of labor demand in June. That will probably be on display two weeks from today, when the monthly non-farm payroll report is published.

The four-week moving average remained at 426,000 for the week ending June 18. This is the week that the Bureau of Labor Statistics surveys payrolls, and the figure is essentially the same as it was during the May payroll survey week.

A weak payrolls number for May is supported by a Bloomberg Economic Brief model that examines the relationship between jobless claims and nonfarm payrolls — specifically, what level claims must decline to for payrolls to show sustained growth. The model is based on a regression of the monthly change in total employment against the four-week moving average of initial claims.
The model indicates that the level of initial claims necessary to support sustained labor demand sits at roughly 415,000, below the current level of claims.
Technical, seasonal and holiday issues may result in volatile claims data for the next few weeks. A Labor Department official said after the June 18 report that claims in six states all had to be re-estimated due to technical problems.
The July 4 holiday will likely also distort claims, since this year it falls on Monday, the day claims are usually reported.
Seasonal adjustments to the data may have the biggest effect. Auto shutdowns were pulled forward earlier in the year than usual as a way to handle supply shortages following the Japanese earthquake. The normal downwards seasonal adjustments to claims to remove distortions from the shutdowns may result in a sharp decline in reported claims in July, when auto production is expected to increase at 20 percent or more.

And here is the correlation between the two graphically.

Incidentally, the topic of weak claims forced Goldman Sachs to also release a note to clients, seemingly to calm them down about the 11th consecutive weekly print of 400K+ in claims.

Initial Claims are an important signal at times of cyclical uncertainty

Regular followers of our global macro and markets research will know that we attach a large degree of importance to the data on initial claims – as a timely indicator of the underlying momentum of the US economy, and as a signal for turning points in markets. We first explored this idea rigourously in January 2009 – in “When Markets Turn”, Global Economics Weekly, 09/02 – and found that around key cyclical turning points, risky assets like equities or our WF Growth basket tended to respond to the early signs of shifts in the growth momentum as captured by the data on initial claims for unemployment insurance.

It is instructive too that in this current episode of growth worries, initial UI claims hit a low-point in late-February and early-March and started to climb (i.e. started signalling a slowdown) ahead of other cyclical indicators and coincident with downdraft in the Wavefront US Growth basket, with the overall index itself lagging. So in this case too, claims have acted as the ‘canary in the coal mine’, and so the retracement in this data even as some of the other top-tier cyclical indicators are still worsening is intriguing.

In past research we have also noted that the strength of the signal for markets from shifts in data like claims is most clear around key cyclical turning points. We are probably not at a key cyclical turning point at the current juncture, although it certainly feels like we have been through more than our fair share of cyclical twists and turns two and a half years into the global recovery – a notion that Dominic Wilson explored in the GEW (“Are Cycles Getting Shorter?”, 11/23) this week. However, the unusual abruptness of the slowing in the macro data globally, and specifically in the US, means that there is a high premium to gauging the true underlying momentum of the US economy and the degree to which it is likely to recover from transient influences such as Japanese supply and weather disruptions and a fading oil shock. And while we focus on a host of macro information – hard data, surveys, and our own proprietary and co-incident and leading indicators – to arrive at that judgement, most of these are typically available on a monthly frequency, whereas initial claims have the great virtue of being available at a weekly frequency.

This higher frequency of the claims data is all the more useful currently given that we know that some of the monthly data – cyclical surveys for example – are likely to still be contaminated by the supply chain disruptions emanating out of Japan. And so for top-tier cyclical surveys like the ISM survey, it may not be until the July survey results, out in early August, that we potentially see any signs of stabilization, which are tentatively evident in production plans in Japan and in the weekly production statistics of Japanese manufacturers of transportation equipment in the US.

Pinning it all on Claims – a 30% to 50% retracement of the data weakness

Consider the following question. If we only focused on the weekly initial claims numbers, what would that tell us about the current momentum in the US economy, and the extent to which it is likely to recover from its abrupt slowing over the past three months or so?

Starting with the raw claims numbers, these were at their lowest point in late-February at 375k. From that point on they increased to a maximum of 478k in late-April – mostly on the back of transitory factors to do with auto disruptions and seasonal adjustment issues as described by our US economists (US Daily: Rise in Jobless Claims Mostly Temporary, 16 May 2011). In subsequent weeks UI claims have printed lower with the latest number yesterday coming in at 429k. This suggests a roughly 50% retracement relative to the roughly 100k deterioration from trough (375k in late-Feb) to peak (478k in late-April). Given the noise in the week-to-week fluctuations, we often look at the four-week moving average of this data. On this basis, claims bottomed at 389k in mid-March, before increasing to 440k in mid May, and the latest observation here is 426k. This implies a roughly 30% retracement relative to the trough to peak deterioration. So with all the caveats that come with extrapolating from such a narrow slice of data, based only on this one indicator, one would conjecture that the economy should regain 30% to 50% of the momentum it lost.

Our US Current Activity Indicator (CAI) suggests that the growth rate of economic activity, broadly defined, in the US slowed from close to 4.1% qoq annl. in March to 1.7% qoq annl. in May, a fall of about 2.5 percentage points. Assuming that this is the low point – and Philly Fed and Empire surveys suggest that the June outturn of our CAI may be somewhat lower still – then the 30%-50% retracement in the claims data suggests that if broad activity growth improves to the same degree, it may recover by between 0.8 and 1.2 percentage points to somewhere in the ballpark between 2.5% and 3% qoq annl. This would leave activity growth in the vicinity of, or just a little below, our 3.25% qoq annl. forecast for GDP growth in the second half of 2011.

Of course there are several reasons to skeptical about any of the precise numbers from such an exercise, and arguably we are taking the claims data “too seriously”.
There is no reason why the initial low level of claims is a ‘fair’ or appropriate benchmark, given that it may also have been distorted by special factors. And while the relationship between activity growth and initial UI claims is tight, it is surely not perfect, with probably at least a short lag. The aim of this calculation therefore is to simply illustrate the extent of recovery that would be likely in activity growth if it was commensurate with the retracement in the initial claims data in a simple way.

Bottom line, no matter how you spin it, a very ugly NFP number is coming. The implications of this drop in jobs growth on Treasury tax revenues is the next topic that will be investigated.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Mercury's picture

This ugly number which will merely further cement the case for further monetary or fiscal stimulus (and forget the latter), will come just in time for the Manufacturing ISM to print sub 50, and send the confirmation that we have all been waiting for that the US economy is now officially contracting.

Oh but just think how bad things would have been without all the stimuli, bailouts and pork. You have to consider GDP saved or created...

Popo's picture

The winds of deflation are picking up quickly now.

DonnieD's picture

Don't worry, Obama will tap the SPR again soon. Everything will be better.

midtowng's picture

It's all good because stocks won't drop like in 2008. Larry Kantor says so.

Caviar Emptor's picture

Until...something else comes along. 

Think outside the box, my friend

youngman's picture

Bad news does not seem to do anything...but make the market go up....they will call it "unused opportunity"

Popo's picture

I remember saying those exact words about a month before the dot com crash.  

Everyone was marveling at the negative revenues of companies with rising stock prices:  "The bad news doesn't seem to matter..."


...and then it did.

ElvisDog's picture

In my opinion, the market is where it is because of two factors - the Fed POMO activity and the perceptiont that S&P earnings growth is high and will be sustained indefinitely into the future. At some point though, the combination of input cost pressures and high unemployment/underemployment is going to reduce profit growth or cause an absolute reduction in profits. Then, we will see what we will see.

SheepDog-One's picture

Must.....maintain....mythical DOW 12,000.....must keep.....401K Bathrobe Brigades.....from getting nervous.....must pump...

augie's picture

Hey dog, I'm really tired of getting stopped out of my /es puts, could you let me know when tteh QE3 is finally priced in so i can stop wasting my money? 



SheepDog-One's picture

No idea! Only way the world is running is by elephants dancing on the head of a pin with 'QE-no QE' daily flip flops depending on whats crashing that particular day. 

iNull's picture

Sounds like a bad case of Bernankerea.

youngman's picture

I agree DOG....that is 80% of the market today....getting and keeping it up so people do not fear their quarterly 401K bad its all fake...these low volume up days are going to come back to haunt us and they will drop fast..

achmachat's picture

in your personal opinion... how much more ressources, how many more little tricks do they still have to keep silver below 36 und thus under the radar of the general public?

Josh Randall's picture

Nobody knows (or at least those that are honest), but it appears to be a situation where the price will one day soon be dictated to by true market forces and demand for physical. Keep looking for a true historic Gold to Silver ratio of 15:1, or 10:1; hence the establishment knocks down Gold or reins it in to keep both in line -- so keep buying these dips as that 15:1 or 10:1 will look solid when Gold hits 3k

ElvisDog's picture

At least the level is higher now. I can remember people complaining about silver market suppresion when it was $5/oz

Boilermaker's picture

REITs in full blast off now...they have full control now. Time to relentlessly bid them up with wreckless abandon.

Boilermaker's picture

They used the moon's graviational pull to slingshot further into the galaxy.

Yea, they are still up even with the sell off in the broader market.  Hey, why the fuck not.  What is left to lose now?  Credibility? 

SheepDog-One's picture

Most of the FED's 'assets' are in that REIT crap, must....pump 'assets'....must cause inflation....of our worthless....'assets'...

Boilermaker's picture

It's some amazing shit.  That they can keep it at these levels or even jam it higher is just a testament to their unrelenting dedication to fraud.  Unreal.

LMAO's picture

@ sheepdog


Just replace "assets" with "ass-hats" and your statement makes all the more sense. It almost sounds the same anyway.



Lone Mad Minute Medic's picture

Where is my parabolic Silver?

Long-John-Silver's picture

Buried under 38,000,000 ounces of counterfeit paper Silver.

Caviar Emptor's picture

Eurosclerosis has finally set in to US economy.

That was an inevitability once the point of diminishing returns of endless monetary stimulus was reached.

SheepDog-One's picture

I was watching a great zombie movie last nite, the trick is to keep flexing the joints of the zombie to prevent rigormortis from setting in.

Caviar Emptor's picture

I predict a resurgence of zombie movies (no pun)

fuu's picture

It is a genre that needs resuscitation. Or maybe just some rejuvenation.

Cassandra Syndrome's picture

What's going to be today's news release at 3pm EST to save the plunge? Bambi's mother is alive?

Greeny's picture

Ashraf Nailed, about QE3 and latest FED moves:

Long-John-Silver's picture

They can't print oil. The strategic oil reserves are physically limited. Eventually the oil will run out and then what will they do?

RobotTrader's picture


New highs for SBUX, BBBY, and assorted other retailers.

Must be celebrating yesterday's "tax cut" by unleashing the SPR.

lizzy36's picture

There's a party going on right here......Celebrate good times come on......

Whoops looks like instead of lasting the year it lasted.......24 hours. Another excellent move by an administration who believes that intervening in the markets is a better strategy than actually doing something about the economy.

Alas, one wonders what quid pro quo one gets for paying almost $40k a seat for a dinner @ Daniel (nyc) with Obama. Said dinner took place last night.


RobotTrader's picture

Worst news flow since 2008 and the REITs and retailers are less than 3% off 3-year highs.

I wonder when the real selloff gets going??

rubearish10's picture

So now we wait 'til next Friday (ISM) or the following Friday for NFP to find out if 200 DMA meets its match. Not! That leaves too much time for TBTB to design more of those surprise stick save reversals. Master Plan remains to secure the public perception that commodities are cheaper now  and the (401k) market holds in the 12m's. 

"Maybe a two-headed Black Swan" would be a deal breaker. Italy/Spain downgrade and US Budget Impasse II.



RobotTrader's picture

Yep, first sign of trouble in Europe.

What do do?, What to do??

Sell gold.

Bohemian Clubber's picture

I am no specialist but would conclude the contrary amigo

lieutenantjohnchard's picture

you recommend sell so i buy.

robottrader: fast, dependable, cost effective 1099 processing. serving the greater los angeles area since 2011.

Bohemian Clubber's picture

But I thought Quantitative easing was not like printing, I mean it is just to re-capitalize the banks via excess reserves right? Why do you people use the word 'printing' like Bernanke is throwing money out of an helicopter?

I agree the government is throwing money out of the window with keynesian stimulus etc but it is different then the FED right? Thank you to clarify, I am new here and a bit confused.


Caviar Emptor's picture

The Treasury borrows money...from primary dealers....with a guarantee to flip to the a profit. 

So the US Gov is borrowing from itself. That's Money printing. Can you do that? 

Caviar Emptor's picture

Volume is continuing to nosedive. 

That of course opens the door to volatility (Bots trading around established positions, shaking out weak hands)

And of course means that covert spreads are way wider (thanks to HFT quote stuffing and order flashing)

Which all translates into a tough road to hoe for most traders not using multiple Sparc stations in parallel running neural algos.

Of course just plain cheating is the most effective algo of them all. Hiding in plain sight, camouflaged by tech cover story

Eireann go Brach's picture

Maybe Mc Donalds could fire 30k employees who salt the french fries and then rehire them the following month so it is a positive for the NFP, sounds like Obamanomics to me!

sbenard's picture

Michelle Antoinette would be devastated by the loss of the french fries. She proclaimed yesterday that she just couldn't stop eating them.

sbenard's picture

Wow! Is this what has caused stocks to fall off the wagon so far this morning?

Greeny's picture

Check Silver, it's falling even more..

Stocks, EUR, SILVER usually moves in same direction,

so when you cheering Stocks fall, don't forget count your

loses in PM holdings as well. Silver lost $2.40/ oz so far

since 2 days ago.