THOUGHTS ON THURSDAY’S DATA
Initial jobless claims came in much better than expected though the labor department is warning that seasonal trends played a large role in the improvement. Econoday reports:
Substantial improvement, but improvement tied to seasonal adjustments, is underway in jobless claims where initial claims fell 47,000 to a lower-than-expected 522,000 in the July 11 week (prior week revised to 569,000). The four-week average is down 22,500 to 584,500. Continuing claims really fell, down 642,000 to 6.273 million. But the Labor Department is warning that results for both initial and continuing claims are being affected by prior layoffs in the manufacturing sector, layoffs that are largely seasonal and that happened earlier than usual this year. Stocks and commodities popped higher, but only briefly, in initial reaction to the headline decreases.
The Philly Fed survey came in worse than expected at -7.5. Improvement in manufacturing is proving to be a very slow process.
Actual claims without the seassonal adjustment were 667,534 which was an increase of 86,389 from the prior weeks claims of 581,145.
If you subtract out the seasonally adjusted claims of the past two weeks and add in the actual claims then the 4 week moving average is 623,920.
That makes the chart above look a whole lot different. The actual claims were near the highs and the moving average is holding steady in the low 600s.
Even with the questionable seasonal adjustment, claims are near the January level (3 months post Lehman collapse). These high unemployment claims are with fiscal stimulus, interest rates close to zero, and with companies and state/municipal governments having large numbers of people work short or part-time instead of hitting the unemployment line. Aggregate working hours fell 0.8% last month which is about a 10% annual rate and a higher average rate than the 7% decline since June 2008. The rate of decline is also starting to accelerate since April-May.
Thanks Rob, that’s a great addition.
You are quite welcome.
I would be interested to get good information on how many people are unemployed and no longer qualify for benefits (extended or otherwise). I would expect continuing claims to fall a bit and then flatline as benefits from the very peak months of job losses run out as least until new claims drop significantly below the 600s on an ongoing basis. As the number of unemployed without benefits rises that is a big negative for consumer spending.
Regarding demand, Howared Silverbatt at S&P publishes issue level data on the S&P500 companies on a regular basis. As of July 14, the first 37 companies that have reported show sales up 0.6% versus Q1 2009, but if you exclude Goldman Sachs which had a 28% increase in revenues then the other 36 companies saw sales down -3% versus Q1 2009 and -7% versus the same quarter prior year. This is clearly not yet fully representative of all companies but there is a good cross section of industries and strong and weak companies. This fits with the economy still contracting although at a slower pace than in Q4 2008 and Q1 2009. Earnings look set to rise somewhat due to cost cutting which is helping to drive unemployment ever higher.
Looking back to Q1 2009, both the bottom-up and top-down analysts were too optimistic on earnings. Per S&P’s Silverblatt, earnings came in 25.5% BELOW bottom up analyst’s estimates of $13.62. Top-down estimates started at about $11.50 and dropped to $10.66 by the end of April. Operating earnings actually came in at $10.11. Nevertheless, CNBC constantly quotes that companies beat estimates last quarter and will beat estimates this quarter. Current Q2 2009 estimates $14.15 before earnings started (now $14.06) are very close to the Q1 2009 estimates just before earnings started to be reported (a bit higher). The stock market continued to go up during earnings season on guidance and green shoots, not delivery of solid earnings as Q1 estimates fell throughout Q1 earnings season.
Clearly earnings and unemployment will remain decoupled for the foreseeable future just like the world economy has decoupled from the US economy. The will be no feedback loop. Unemployment is just a lagging indicator. Right?
Rob,
I’m familiar with Silverbatt’s work. He does a nice job. I don’t know if you’ve been following my earnings updates, but I’ve spoken about this in detail. Companies are simply cutting costs faster than analysts are raising their estimates. This was the main reason that I covered shorts last week and went slightly long. There is no real top line growth in America right now. It’s all bottom line from the mass firings and cost cuts. That can only last for so long….
The adjusted jobless claims are still an enormous number. You are correct that it is a lagging indicator, but this recession is different. This is a consumer driven deleveraging cycle. Don’t be shocked if jobs end up being more of a coincident indicator during this recovery.
What I don’t understand is that earnings estimates (per S&P) for Q1 2009 were $13.62 as earnings season started (i.e. April 1), but actual operating earnings came in at $10.11 (or 25.5% under estimates). Nevertheless, it was reported in the media that companies beat estimates and by a wide margin in Q1 2009, but in fact total aggregate earnings were BELOW both the bottom-up estimates (composite of individual company analysts) and the top-down (brokerage economist) estimates.
The Q2 2009 bottom up estimate was $14.84 on March 31, 2009 and has come down to $14.06 today. At the same time, the S&P 500 has risen from 797 at the end of March to 941 today.
Earnings have been coming in under the S&P bottom up estimates by a wide margin since at least the beginning of 2008.
Bottom-up analysts have had to come way down on their forecasts for Q2 2009. The estimates for Q2 2009 were
06/30/2009: $26.79 (after Bear Sterns, but before the Fannie Mae takeover)
09/30/2008: $25.44 (after the collapse of Lehman)
12/31/2008: $19.92 (after the October/Novebmer crash)
03/31/2009: $14.84 (after the February/March crash and partial recovery)
06/30/2009: $14.06 (after the blossoming of green shoots all over the place)
Are you saying the current estimate of $14.06 is too low? That is a 39% increase from Q1 2009 earnings of $10.11, about +37% with the elimination of GM. (Is a 39% increase in earnings realistic even if it is from a depressed level?)
The biggest quarter-on-quarter increase in operating earings since 1988(excluding Q1 2009 when earnings were infinitely better since the prior quarter was a loss) was +12.6% from Q2 to Q3 1999. As earnings recovered after the 2001 recession following a 40% decline from peak earnings in 1999, the biggest quarter on quarter increase was 9.2% from Q4 2001 to Q1 2002. (Remember the recession offically ended in Q4 2001). There was then a bigger print from Q2 to Q3 2003 of +11.5% growth in operating earnings as the economy recovered and unemployment started to fall. GM is out of the S&P 500 so the Q1 number ex GM would be about $10.25 or so. A 12% increase on Q1 would lead to earnings of about $11.50 and that would qualify as the biggest quarter on quarter earnings growth in at least 2 decades (excluding the Q1 2009 follow-up to the kitchen sink quarter of Q4 2009. Top-down analyst’s estimates for Q2 2009 are $11.05. Even the top-down analysts were overly optimistic in Q1 as they originally had earning forecast near $12, but earings came in 15% lower. I doubt that earnings come in under $11 in Q2 2009 (if they do the market will tank), but I would be shocked if they come in much over $12 even with the Fed subsidizing the financials with all the free money they can use. The banks have had practically unlimited free money since January covering almost all of Q1.
My comments above on unemployment were meant to be ironic. Like you I believe that unemployment will be a coincident indicator or maybe even a leading indicator to some extent this time around. I do not believe that earnings can be decoupled from unemployment for more than a lucky quarter or two. I believe that there will be a negative feedback loop. As unemployment rises (or at least working hours decrease) sales will continue to fall and margins will be squeezed as companies will lack pricing power. So companies will continue to cut fixed cost (i.e. salaried hours if not heads) which will reduce spending power and as consumers save more in fear of losing their job, sales will decline. Foreclosures will increase beyond anyone’s expectations as the unemployed can’t be refinanced and more and more people on the coasts simply walk away from homes that are worth half the mortgage. (I personally know at least 10 people who have done so even though they had the financial means to pay their mortgage.) The foreclosures building behind the mortetorium dam will overflow the market at some point and send home prices on another sharp leg done in bubble areas and areas with very high unemployment. I bet at some point the goverment will make another Lehman style mistake. Eventually they may even let a company to which Goldman Sachs has unhedged exposure fail. (No, strike that last crazy thought!)
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