Thursday, 11 October 2012

US ECONOMY (October 11th 2012): US Jobs and Unemployment Improvment As We Approach US Election? Believe the Stats, is the Recovery Real?

With the US Presidential election just weeks away, the various US unemployment statistics have come into very sharp focus from the wider public and mainstream media. The economy, we're told, will be the most important factor as American voters head to the polls to elect either Mitt Romney or re-elect Barack Obama for a second term.

Democrats might, in that case, be flooding Federal Reserve Chairman Ben Bernanke's mailbox with Christmas Cards this year, as the Fed's latest QE program could be helping the US economy just in time for the election.

We say that with the release of today's Unemployment Claims, a dramatically improved multi-year low, far better than analysts had estimated - possibly the earliest sign that QE3 has begun helping the US economy.

We'll add a few caveats here - firstly Unemployment stats are prone to revision, seasonality formulas, data outliers, and are not the best natural leading indicators for the economy. However, the overall trend in Unemployment Claims is a useful one, as we can correlate "improvement phases" with good returns in equity markets, and more broadly bull/bear markets when claims fall over time.

From March 2012, we stopped seeing a material improvement in US Weekly Unemployment Claims - something that contributed to our view that a medium term "bearish phase" had begun for the US economy, likely to last several months.

We consider that bad trend for US economic data to be over, and that the market already reflects data materially improving (as today's data suggests) between now and the end of the year courtesy of QE3. This data release is perhaps the first to reflect that properly - the lowest reading since the 2009 bull market began, and a return to the overall "falling" trend in Claims.

Let's see how this compares with the other US Employment stats from last week, including the highly controversial 7.8% Headline Unemployment Rate.

Check out the problems we have with Unemployment stats in general here.

In short, we think Non Farm Payrolls are overrated as an economic indicator, that ADP is often a better reflection of economic trends, and that the Headline Unemployment Rate is not very useful for investors.

So much has been written on the 7.8% Unemployment rate this week, including claims that the BLS have somehow altered the statistics to favour Barack Obama and the Democrats. We simply don't believe those conspiracy theories, on grounds of realism and lack of motive. Also, because the Unemployment Rate is a fairly lousy indicator for whether the economy is going in the right direction.

Just take a look at the Unemployment Rate chart. It's telling us that the US economy has been in an expansionary phase since late 2009. That's something we could have told you in early 2009. We don't want to find out that the Titanic is sinking when the Band is already playing on deck and the hull is pointing in the air - we want to know as soon as we hit the iceberg, and preferably a lot sooner than that. Our message is - look at the indicators which work, and not the ones which consistently lag the others.

Our other Unemployment statistics, ADP and Non Farm Payrolls, certainly reflect that unlike May, job growth isn't sliding anymore. There isn't a downtrend in job growth - but there isn't much of a recovery trend yet either. This is why today's data is so important - it is the first sign that these indicators will likely start getting better as 2012 comes to a close.


We don't like getting into politics much at Big Macro Picture, and try to remove as much political spin as possible from how data is reported. This writer, for one, has no vote in the US election (I'm British) and has a very moderate, sceptical view when it comes to politics on a whole.

However, we cannot deny that the US election is an important event for the market, as is the ongoing state of the US economy.

Assuming today's Unemployment Claims figure is not a massive outlier and isn't revised dramatically higher, it could be foreshadowing an improvement in other economic indicators in the coming weeks and months. For the election, it might mean Obama's chances improve, if American voters really look at economic data.

For investors, we reiterate what we have said previously.

QE3 really needs to work for the 2009-present bull market to continue. The market has already looked forward, anticipating not only we'd get QE3, but that it would work.

This could, possibly (it's not 100% guaranteed), be a sign that QE3 will work - or at the very least, that something has caused the US economy to continue its 2009 trend of improvement.

However, from June onwards, we need to keep in mind the market has been pricing this in, without really pausing for breath. Now we have noise in the market from backwards-looking earnings, reflecting all the poor conditions we knew about a few months ago.

So, while the green shoots of real economic improvement are there, we do need to keep in mind that technically the market may want to retreat based on election uncertainty and tough earnings from earlier this year. A lot of improvement is indeed priced in.

Should we get a material retreat in equity prices, and data does indeed improve, we may wish to increase exposure to stocks without chasing risk.

In the meantime, please enjoy this detailed alternative graphical perspective of the Fiscal Cliff issue, which we believe tackles the contrarian aspects of investment, the "wall of worry" investment thesis, and a market-oriented psychological analysis of how the market might approach such a economic significant event, in a way that differs from the consensus viewpoint.

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