Jobless Claims Rise

There is a lot of nuance to the jobless claims report. If you just look at the seasonally adjusted headline data, you’ll miss important details. In the week of September 5^th, seasonally adjusted initial claims stayed the same at 884,000 which was above estimates for 828,000. It’s really tough to predict where the seasonal adjustment will take claims. At first glance, it looks like the adjustment brought it closer to non-adjusted claims. 

We won’t have a complete idea what this adjustment does until we have a year of data. So far, we have 2 weeks. It was a bad time to make this change because now we can’t compare current results to the recent recession. However, maybe they felt this makes the data more accurate, so they didn’t want to wait until the labor market normalized.

Bad Weather Increases Claims

Some were expecting an increase in seasonally adjusted claims because they fell so much last week, but that was wrong because there won’t be a mean reversion. This is a wholesale change in the calculation. That’s not to say they won’t ever increase. It’s just that they won’t go back to where they were before unless the economy substantially weakens. 

Non-seasonally adjusted claims rose from 837,000 to 857,000 as you can see from the chart below. That doesn’t mean the economy weakened. It’s lazy to say this was because the economy got worse. It’s very easy to say since the data is still poor (but it’s getting better which is what matters).

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The weakness came from the hurricane and wildfires. Claims in Louisiana rose 7,199 which was a 44% increase. Claims in California rose 17,953 which was an 8% increase. Claims in Texas rose 17% or 9,657. Total in those 3 states was more than the national increase. In my opinion, the entire increase in Louisiana was related to the hurricane because it was massive. 

On the other hand, it's unlikely that much of the increase was related to the hurricane in Texas since it had a smaller impact there. Even still, we can chalk this increase in NSA initial claims up to bad weather. Impact of the hurricane is still being felt, but it’s gradually going away. That impact of wildfires could grow in the next few weeks. We must watch out for an increase in claims in California or any of the other western states such as Oregon and Colorado.

PUAs Spiking

Another notable increase shown in the chart above was in PUAs. They went from 748,000 to 839,000. This is getting very important since they are almost as many PUAs as initial claims. However, this data is very lumpy and shouldn’t be looked at without digging deeper. As you can see from the table below, in the past 3 weeks, Arizona and California combined have made up 129%, 122%, and 71% of the national increase. 

Another crazy aspect of this is California’s EDD says 1.8 million people are getting PUAs, but the federal DOL says continued claims are almost 7 million in California. Data isn’t completely reliable coming from California. Maybe the recent spike in PUAs isn’t related to the state’s economy getting worse.

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Continued Claims Deep Dive

PEUCs must be followed closely starting in about 6 weeks because continued claims will start to run out (after 26 weeks). We don’t want to see continued claims fall because of a decline in people able to get benefits. We want them to get their jobs back. This is why in the 2008 recession unemployment benefits were extended to 99 weeks. 

This time was different because the economy got extremely bad for a short period. Correct response was to give bigger benefits. This recession was much shorter than the last one.

Worst part of this jobless claims report may have been the slight increase in continuing claims. In the week of August 29^th, claims rose from 13.292 million to 13.385 million. We’ve seen an occasional increase in the past few months as the labor market has recovered. Hope is within the next 6 weeks, continued claims fall sharply enough that we don’t need to worry about PUECs.

The size of the improvement will determine if extending claims will be on the table in stimulus talks. Currently, we can anticipate no additional stimulus this fall. On Thursday, the GOP’s scaled back stimulus failed a Senate vote. We could see a stimulus next year especially if the Democrats win. However, it won’t matter much because the economy will have recovered by then. It could even create unwanted inflation if the economy is strong enough.  

Negative Catalysts After Recession Starts

Hopefully, in the next few months, most of the 6 million temporarily unemployed people get their jobs back. If that happens, this will be called a mild recession by historians. Long term impacts won’t even be as bad as the 2001 recession.

The 2001 recession was related to the tech bubble bursting. And the 9-11 terrorist attacks occurred towards the end of that recession. Tech bubble bursting will have similar timing in this cycle. Obviously, a 30% decline in the Nasdaq has completely different impacts than a terrorist attack, but the point here is about timing. 

There will be a negative catalyst happening to an already weak, albeit recovering, economy. It will be interesting to see how much of an impact this tech bubble burst will have on the economy compared to the 2000 bubble burst.

Conclusion

Jobless claims report was muddied by bad weather and confusing data in California. We can't really conclude that the labor market is getting worse. It’s in deep trouble, but slowly improving. Based on this nice improvement, you’d think cyclical stocks like energy would be doing better than they are. 

Obviously, energy is also impacted by supply and demand outside of America. However, the sector is still likely a buy because of the number of projects that have been canceled. Plus, the global economy is reopening as COVID-19’s effects go away.