Posted by Joseph Y. Calhoun, III

We know there have been problems with seasonal adjustments to the unemployment claims data this summer. For example, the auto companies didn’t shut down this summer as they normally do. Usually, the auto companies shut down for a few weeks each summer to retool for the new model year. For some reason - and I have no idea why - they didn’t do that this summer. The Bureau of Labor Statistics seasonally adjusts data in the summer to take account of these “normal” summer layoffs. This year because the companies didn’t do any layoffs the seasonal adjustments skewed the claims data lower. In other words the seasonal adjustment made the data look better than reality in July. The flip side of that is that the seasonal adjustment in August made the data look worse than reality. Since there weren’t as many laid off as seasonally expected in July, there wasn’t as big a drop in claims as expected in August. The point is that seasonal adjustments with the current state of the economy may be causing more harm than good.

Brian Wesbury, the perma bull in residence at First Trust, points out that non seasonally adjusted claims are actually making new lows right now and there is a big spread between the two series:

Digging deeper into the report we noticed that the non-seasonally adjusted data tells an even more optimistic story.  The actual number of claims – the raw data – fell to 380,935, the lowest level since Septmeber 2008, when the financial panic was just beginning.  This is a very encouraging sign.  It suggests that the underlying labor market is healthier than seasonally-adjusted data make it appear.  Moreover, given the pattern of seasonal adjustments, we expect a decline in “seasonally-adjusted” claims to under 400,000 by early October.

I’ve been accused of being a perma bull myself so naturally I find this an interesting data point to support my view that the economy isn’t as bad as the recent data (and probably not as good as the data in the spring). All we can do is wait and see if things improve over the coming weeks but it wouldn’t be a surprise.

One interesting thing about this, if it turns out to be true, is that it could be seen as validating President Obama’s economic approach. There seems little likelihood that the data will improve quickly enough to change the prospects of the Democrats in the midterms but if the data does improve you can bet the President and his team will be trumpeting it from the roof tops. And that won’t make it any more true. I have said many times and continue to believe that the politicians have only marginal impacts on the economy. When it comes to government effects, the Fed has a much greater impact than anything that comes out of Congress or the White House. And that is true for whichever party happens to be in power. But the greatest impact of all is the natural resilience of our semi-capitalist economy. It isn’t perfect by a long shot and it sure isn’t lassez faire, but it is about as good as you’ll find anywhere in the world.

From an investment standpoint the “market” is expecting bad data right now and so the potential for surprises is likely to the upside. Better than expected economic data has the potential to cause outsized moves to the upside as shorts would be forced to cover. Shorts should be careful out there.