“Initial jobless claims plunge to 42-year low more likely indicates a weak labor market, as fewer workers and limited hires reduces layoffs!” – Tweeted by Peter Schiff 7/24/15
It’s quotes like this and numerous others out of financial media that try to twist data to fit their own negative biases that really grinds my gears! Let’s look at the major housing data points we got this week which consisted of Existing Home Sales (EHS) and New Home Sales (NHS). While existing home sales data came in at its highest level since February 2007 along with prices surpassing their all-time highs set in 2006, yet it was NHS that grabbed everyone’s attention. NHS PLUNGED 6.8% from May, leaving year over year gains at 18.1%. Media placed all the emphasis on the decline and virtually ignored the significant year over year gains. What’s even worse is that the relevant sizes of the two data sets were completely ignored. For starters, EHS represent 90% of total home sales. So what does that leave for NHS? EHS are also based on actual closings whereas NHS are based on signed contracts from a small sample size. By definition, NHS are flawed because not all contracts get closed out. Furthermore, NHS are primarily derived from government surveyors following up on the completion of building permits. This involves the surveyor physically going to some of the properties. While that is certainly a thorough method, it shows how limited the scope is especially when looking at how limited government manpower is. EHS, in a contemporary fashion, are derived from data extracted from multiple electronic listing platforms across the country. I’m not going to say that NHS are useless data, but I will say that EHS are the superior metric. I would rather draw a conclusion from a data set based on actual transactions which represent 90% of the subject market than a thin survey. (The 90% figure is stated by the NAR in its EHS press release)
Now let’s take a look at weekly unemployment claims, and how people grind my gears on labor data. Initials claims came out at 255K which was the lowest print since November 1972. Continuing claims, which are my preferred metric, came in at its lowest print since November 1998. I like continuing claims because it represents people going back to work. I know people will scream that the labor force participation rate (LFPR) would disagree with that, but I will address that later. For now, here is why I trust continuing claims to paint an accurate picture of labor market conditions.
In order to qualify for unemployment benefits a person needs to have already worked a minimum amount to apply for them. For example, in New York State, the below are some of the criteria:
“By law, the unemployment insurance program provides benefits to people who:
- Have enough employment to establish a claim
- Have lost employment through no fault of their own
- Are ready, willing and able to work and
- Are actively seeking work
If you worked in New York State within the last 18 months, you have the right to file a claim for benefits.”
This is critical because these requirements allow us to capture the most important part of the labor force…The people that WANT to work. UI benefits are literally a lifeline for tradespeople that have to go without income while they wait for the next job to get started. Whether it’s seasonal or cyclical, UI is a dependable back up for many people. Having had the privilege of growing up in a middle class background, I have gotten to know many people from different walks of life and to this day still surround myself with the rank and file folks that keep this country running. I can assure you, that when jobs end and work gets scarce, UI benefits will be claimed faster than you can say “bear market.” That’s the main reason why I don’t believe the drop in energy has led to overall job losses. I would argue that the majority of displaced workers were able to transition quickly into other positions because of the observed drop in continuing claims. Also in support of workers being able to transition, we know for a fact that construction companies are starved for people ranging from day laborers to machine operators as has been reported in the Fed Beige Book and in various construction company reports.
As for this nebulous LFPR data that grinds my gears, I have yet to be presented with evidence of where people are dropping out of the labor force and going to. Unless you are independently wealthy or have other family paying your bills, a person needs to eat somehow. Some folks will say that the “drop outs” are all the people we see claiming welfare etc., but I beg to differ on that point as well. Unfortunately and as cruel as it is, we have always had people on welfare and there will always be people on welfare. It simply is what it is. I wish it could be otherwise, but a free and market based society will always have someone on the bottom. In short, I find the LFPR to be an ambiguous statistical nightmare that gets attention from media and work shy analysts because it makes a nice easy downward sloping graph.
Over the next two weeks, we will get numerous data points that will set markets up for the second half of the year. The three most important releases will be GDP (July 30), PCE (Aug. 3) and NFP (Aug. 7). GDP could prove to be the most volatile of the three because of the revisions being done. The major revisions will be to the seasonal adjustments that are done to Q1 GDP. In a note put out by the San Francisco Fed, the upward revisions could be worth 1.5% to the upside. So we have that adjustment along with other annual revisions to be applied going back to 2012. These revisions haven’t gotten much talk so far, but I would imagine they will get hyped up as we get closer to the date. One thing is for sure, if any of these data points misses estimates, that will definitely grind my gears!