The strength in the domestic labor market remains impressive, to say the least.
The 4-week rolling average in both the non-seasonally adjusted and seasonally adjusted Initial Jobless Claims series continued to accelerate in the latest week. The strengthening continued despite the true up in the data stemming from technology upgrades in CA and NV that had positively impacted the figures over the last few weeks.
As it relates to next week's payroll data, bloomberg currently has consensus estimates for nonfarm payrolls marked at 175K. This compares with 169K for august and 3-month and 6-month averages of 148K and 160K, respectively.
With strength in Initial claims accelerating over the last month and the seasonal distortion in the data now shifting to a tailwind, we think the balance of risk is to the upside vs expectations, as they sit currently, over the next few months.
Below is the breakdown of this morning's claims data, along with a detailed analysis of the historical relationship between Claims and Nonfarm Payrolls, from the Hedgeye Financials team. If you would like to setup a call with Josh or Jonathan or trial their research, please contact
Should We Care about the Tail or the Dog?
We would make two points with respect to this morning's labor market data.
First, the data is exceptionally strong. For perspective, SA rolling initial jobless claims are now at levels last seen in April 1999 and January 2006. Recollect the market environment in both those periods. Consider the chart below.
Second, since the market seems obsessed with the NFP report that will come out next Friday, here are a couple thoughts on how claims do/don't relate to NFP.
a) The first chart below looks at the time series data back to the start of 1999. Rolling initial claims are in red on the left axis while private payrolls are in blue on the right axis and are inverted to make the relationship more apparent visually. We think that the visual makes it quite obvious that there is a relationship between these two series.
b) The second chart below shows the same data but on a scatterplot. The RSQ is somewhat low at 0.528, but nevertheless the relationship is still quite clear, we think. The blue series is monthly data from 1999 to Present, while the green box is the most recent data for August 2013. Just by coincidence, the most recent data pair was almost exactly on the pin of the regression line. This month's claims data, for reference, would suggest private payrolls of 195k for September, by the way. Unfortunately, the standard error is significant. It is too large to have much conviction in the accuracy of the estimate.
c) The final point worth making is that these two data series are cointegrated. The best definition I could find online for cointegration is the following: "The old man and the dog are joined by one of those leashes that has the cord rolled up inside the handle on a spring. Individually, the dog and the man are each on a random walk. They cannot wander too far from one another because of the leash. We say that the random processes describing their paths are cointegrated." - Link. We ran an ADF test (augmented dickey fuller) to see whether claims and NFP are, in fact, cointegrated and the p-value was 0.038. In other words, there is a 3.8% chance they are not cointegrated, and a 96.2% they are. Cointegration matters because it means that as claims go, eventually private NFP will go, just as the man with the leash will ultimately determine where the dog on the leash ends up.
Prior to revision, initial jobless claims fell 4k to 305k from 309k WoW, as the prior week's number was revised up by 1k to 310k.
The headline (unrevised) number shows claims were lower by 5k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -6.75k WoW to 308k.
The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -17.6% lower YoY, which is a sequential improvement versus the previous week's YoY change of -16.2%
2Q13 GDP: Final 2Q13 GDP largely a non-event. A review of the highlights below:
Net Exports: the upward revision to the advance GDP estimate (advance estimate was 1.7 vs the 2.5 prelim/final)) was driven primarily by the positive revision to net exports.
Generally, we view GDP upside stemming from the balance of external trade as equivocal from an analytical perspective. Relative import declines are positive from an accounting convention perspective but, from a macro perspective, import growth is generally associated with positive economic growth.
While debt financed consumer (end) consumption of imports could be viewed negatively, an increase in capital equipment and raw material imports is supportive of domestic production and ultimately a net positive for national income. So long as the rise in imports didn’t come at the expense of resource utilization domestically, it’s constructive for domestic economic activity.
Consumption: Growth in Consumption was down sequentially in 2Q13, decelerating on a QoQ basis and providing a smaller positive contribution to GDP on the quarter.
Given the soft, real disposable income growth observed thus far in 3Q13 (due to the combination of furloughing and continued job loss at the federal level and ongoing, muted wage inflation broadly) and the flat savings rate, were not expecting material acceleration in consumer spending in the very near term.
Weak Dollar policy out of the fed and the prospective flow through to commodity inflation presents another headwind to an acceleration in consumption growth from here.
Domestic Demand: Real Final Sales (GDP ex-Inventory Change), Gross Domestic Purchases (GDP including imports, excluding exports) & Real Final Sales to Domestic Purchasers (perhaps the cleanest read on total domestic demand as it measures GDP including imports but excluding both exports and Inventory change) all accelerated strongly sequentially.
Investment: Growth in Private investment was revised lower by 70bps in the 2nd revision, but still very strong for the quarter at +9.2%.
Government: Government expenditure growth remained negative on the quarter but was less of a drag than in 1Q13. Government spending grew -0.4% in 2Q (vs -4.2% in 1Q), contributing -0.07% to GDP (vs -0.82 in 1Q).
Inflation: The GDP Price Index and Core PCE inflation were revised lower with both coming in at 0.6%. With Core PCE being the Fed’s preferred read on inflationary pressures, the disinflation currently prevailing remains supportive of the committee’s dovish policy lean.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
Christian B. Drake