Initial claims dropped 16k last week to 453k (falling 12k before the revision). Rolling claims came in at 457k, a decline of 6.25k over the previous week. Reported claims fell near the bottom of their YTD range of 450-470k, but, importantly, are still squarely in the YTD channel and well above the 375-400k range necessary for the unemployment rate to fall.
An article in the New York Times last weekend (link sign-in required) highlighted the expiration of a stimulus program that directly subsidizes jobs, paying employees’ salaries in whole or in part to encourage small businesses, nonprofits, and government organizations to hire. The $1B funding was a part of the emergency fund for the welfare program Temporary Assistance for Needy Families. “The federal program has helped employ nearly 130,000 adults and has paid for nearly an equal number of summer jobs for young people, according to an analysis by the Center for Budget and Policy Priorities, a liberal policy institute in Washington,” reported the Times. The program expires today, unless Congress and the President agree to extend it. The Times noted that the extension is opposed by Congressional Republicans against further stimulus-related spending. If the job creation estimate is correct, this could be a significant headwind for the initial claims series.
Our firm's expectations for an ongoing economic slowdown relative to the first half of the year and into 2011 will keep a lid on new hiring activity as management teams focus on cost control. All of this raises the risks that a prospective slowdown in GDP will precipitate an incremental slowdown in hiring/pickup in firings, which will, in turn, further pressure growth. We continue to look to claims as the best indicator for the job market, as they are real time and inflections in the series have signaled important turning points in the market in the past.
The following chart shows 2-10 spread by quarter while the chart below that shows the sequential (quarterly) change. The 2-10 spread (a proxy for industry NIM) has been compressing rapidly in the past two quarters. Yesterday’s closing value of 207 bps is down from 212 bps last week. This quarter vs. last quarter is down 38 bps, which is a sequential acceleration from 2Q10 being down 19 bps vs. 1Q10. Moreover, the yield spread, were it to stay flat at present levels through 4Q10 would lead to a 4Q10 sequential decline of 17 bps. The headwind will grow in significance as it affects most companies on a lag.
The table below shows the stock performance of each Financial subsector over four durations.
Census headwinds should finally abate on or about this week as end of September has historically been the last significant month of Census firings.
Joshua Steiner, CFA