The stock market can be downright superstitious when it comes to symbolic numbers. The latest bad figures for Wall Street came yesterday, after the Department of Labor announced that new unemployment numbers for last week reached 500,000. The news sent the market into a dive, with the Dow Jones industrial average dropping 144 points.
The half-million newly jobless frightened the market because it was the highest weekly number in eight months. It suggested to already jumpy traders that the economy is still as weak as it was in November, when we last saw claims that high.
But if you look at the fine print of the announcement, the power that Wall Street gives the number seems arbitrary. The real figure, listed under unadjusted claims, was actually 402,000. Even odder, a month ago the actual number of new weekly claims was 513,000 and the Dow nearly stood still.
That’s because the figure that Wall Street is reacting to is the “seasonally adjusted” number, which means economists at the Labor Department have altered the raw data to try to account for job changes that happen every year at that time. High-school kids get summer jobs in July; teachers tend to get fired around June. To account for changes that happen every year during the same months, statisticians subtract or add to the weekly number so it’s a consistent indicator that can be compared week by week. But the adjustments are based primarily on a normal economic cycle, not an economic downturn.
“It’s very hard to create a model during a time of real uncertainty, like when you are in a prolonged recession," says Stefania Albanesi, an associate professor of economics at Columbia University.
“It’s not totally irrational; right now people are very scared," says Robert Johnson, associate director of economic research at Morningstar. "They lost so much money in so little time, they are looking for clues in anything. But these are claims being filed by state employees who are overworked, they go on vacation, claims get backed up or not filed on time. There is a certain randomness to weekly numbers. They are useful, but people treat them like the Bible.”
For instance, summer jobs that center on tourism are hurt more than other types of jobs during a downturn, as people cut back on vacation plans. And since job patterns in a recession are different from those in normal times, it makes the adjustments more difficult than usual.
“The standard error around these seasonally adjusted claims is probably a lot bigger than the psychological threshold that Wall Street has,” says Albanesi. “It’s puzzling that so much is made of this number."