Good News and Bad News (and Bad Data)

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Good News and Bad News (and Bad Data)

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Drew Matus
JUN 04, 2020

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In normal times seasonal adjustment factors are applied to data to smooth out the normal waxing and waning of the labor market, retail sales and the like. After all, it would make little sense to get excited about consumer spending rising in December but then to become worried when spending declined in January. However, given the speed and the magnitude of the impact of COVID-19 on the economy and on economic data, we believe it makes little sense to make adjustments for traditional patterns when, in doing so, you may be distorting the data and limiting its value as an indicator of whether the economy is improving or faltering. 

The claims data show this clearly. In February, seasonal factors deflate the number of claims filed as retailers continue to layoff workers post the holiday shopping and return season. For example, in the  first week of February, the not-seasonally adjusted claims data rose by 225,0001 but, after accounting for the normal seasonal variation during that time of the year, the seasonally adjusted claims figure (what is in all the headlines) was reported to have increased by just 201,000. In normal times, these adjustments make sense. 

Post-COVID, when the level of claims has reached unseen heights, applying a standard seasonal adjustment distorts, rather than clarifies, the picture. For the most recent week,2 the reported seasonally adjusted claims filings rose by 1,877,000 versus not seasonally-adjusted claims filings (actual, if you will) of 1,603,000. This is because this week, as can be seen on the chart below, was a big adjustment week. (To get a sense of scale, if the seasonal factor used this week was applied to data from the first week of February the impact would have been to add 34,000 filings. However, because the post COVID filings have been so large, seasonal factors added 274,000 to the past week.)

In fact, the period coinciding with COVID is a traditional period where the seasonal adjustment boosts the unadjusted data to account for seasonal variations. Indeed, if we sum up all of the seasonally adjusted claims during the COVID crisis period (mid-March to present), the number of seasonally adjusted claims filed during that time is 42,647,000, a figure that is 3.8 million larger than the unadjusted claims filed during that period. 

We believe this period of extreme overstatement is about to end. The seasonal adjustment factors (in green below) are returning towards levels where they will likely inflate claims by far less than has been the case over the last two and one-half months. In other words we believe the reported claims will fall next week, and we  expect them to fall sharply based on the lack of a seasonal factor pushing them higher.

Good News and Bad News (and Bad Data)

 

Endnotes

1 All figures in this report from the U.S. Department of Labor (DOL) or derived from that data.

2 Initial claims data as May 30, 2020.

Disclosure

Disclosure This material is solely intended for Institutional Investors, Qualified Investors and Professional Investors. Not for use with Retail Investors. This document has been prepared by MetLife Investment Management (“MIM”) solely for informational purposes and does not constitute a recommendation regarding any investments or the provision of any investment advice, or constitute or form part of any advertisement of, offer for sale or subscription of, solicitation or invitation of any offer or recommendation to purchase or subscribe for any securities or investment advisory services. The views expressed herein are solely those of MIM and do not necessarily reflect, nor are they necessarily consistent with, the views held by, or the forecasts utilized by, the entities within the MetLife enterprise that provide insurance products, annuities and employee benefit programs. The information and opinions presented or contained in this document are provided as the date it was written. It should be understood that subsequent developments may materially affect the information contained in this document, which none of MIM, its affiliates, advisors or representatives are under an obligation to update, revise or affirm. It is not MIM’s intention to provide, and you may not rely on this document as providing, a recommendation with respect to any particular investment strategy or investment. The information provided herein is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. Affiliates of MIM may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives) of any company mentioned herein. This document may contain forward-looking statements, as well as predictions, projections and forecasts of the economy or economic trends of the markets, which are not necessarily indicative of the future. Any or all forward-looking statements, as well as those included in any other material discussed at the presentation, may turn out to be wrong.