Continuing claims data suffers from the same biases as initial claims data as it is built using the same models. When unemployment claims are running high it assumes a greater number of them are attributable to seasonality. And we happen to be heading into the weeks where the highest percentage of claims will be stripped out in the name of seasonality.
We spent 27 consecutive weeks this year (April through October 3) with the reported continuing claims numbers in the 6M+ range. Over the next 10 weeks the number gradually declined to just under 5M. In the next two weeks we believe the adjustment model can push the figure to 4.1M and possibly produce a below 4M print in January. (At this point we expect it to rise again in the spring.)
There are two factors at work here. The first is the fact that individuals can only remain in the data series for 26 weeks. After that they are eliminated, even if they are still jobless and collecting benefits (which can last up to 79 weeks now). As a result the number is generally pressured lower by the fact that people are getting kicked out the back end of the data faster than they're coming in the front end, even if they're still jobless.
The second factor is the seasonal adjustment that suffers the same biases we discussed for initial claims. Specifically 14% of continuing claims this week will be assumed to be seasonal (up from 2% last week) and 30% of next week's claims will be assumed seasonal. This will translate into 1.2M people being erased from the headline number next week, vs. only 109K last week.
Here is the real crux of the issue, in our view, all the market ever really reacts to is the m/m change in seasonally adjusted non-farm payroll. And that number is very heavily influenced by the m/m change in the seasonal multiplier.
Every now and then circumstances come along that in our view lead to predictable distortions in the data that will create the appearance of a trend, whether or not that trend is real. We believe we are at one of those points. What is really happening and what appears to be happening with the economy can be two very different things for a certain period of time.
Source: Zerohedge
