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25 April 2011
Western Electric Rules for Detecting Breaks in Established Trends Using Statistical Control Charts

We've been in the midst of a data conversion project behind the scenes here at Political Calculations, in which we've been upgrading our previously generated analyses that were maintained in Microsoft Excel's 2003 format to the newer 2010 format. As part of that project, we have also been automating various aspects of our analytical techniques, so we don't have to work as hard to divine what we can from the data we read.

Today, we're showing off the first stage of what we've done with weekly U.S. seasonally-adjusted initial unemployment insurance claim filings, where we've previously applied statistical control chart-type analysis to identify major trends and turning points in U.S. layoff activity.

Here, we've automated the "red flags" given by Western Electric's four major rules for detecting when an established trend might be breaking down, which in turn, allows us to more precisely track changes in trends over time.

As a result, we've refined our previous presentation of the seasonally-adjusted major trends in U.S. layoff activity, which we've presented in the chart below, where we've arbitrarily selected the first weekly new unemployment claims report of 2006 as our starting point.

Seasonally-Adjusted Initial Unemployment Insurance Claims, 7 January 2006 - 3 March 2011

The table below lists the corresponding dates that apply to each identified trend, as well as the likely trigger that caused the shift initiating the trend. Here, we identify news events that could cause employers to revise their existing outlook for their employee retention decisions that occurred in the 2-3 weeks prior to the shift in trend taking hold.

This 2-3 week period of time is consistent with the practice of employers reacting to a change in their business outlook with their next payroll cycle, without altering their current payroll cycle. In the United States, since most employees are paid on a weekly or biweekly basis, that translates to our two-to-three week long window of time for a such a reaction to an outlook-changing event to be reflected in the government's official data.

Timing and Events of Major Shifts in Layoffs of U.S. Employees
Period Starting Date Ending Date Likely Event(s) Triggering New Trend (Occurs 2 to 3 Weeks Prior to New Trend Taking Effect)
A 7 January 2006 22 April 2006 This period of time marks a short term event in which layoff activity briefly dipped as the U.S. housing bubble reached its peak. Builders kept their employees busy as they raced to "beat the clock" to capitalize on high housing demand and prices.
B 29 April 2006 17 November 2007 The calm before the storm. U.S. layoff activity is remarkably stable as solid economic growth is recorded during this period, even though the housing and credit bubbles have begun their deflation phase.
C 24 November 2007 26 July 2008 Federal Reserve acts to slash interest rates for the first time in 4 1/2 years as it begins to respond to the growing housing and credit crisis, which coincides with a spike in the TED spread. Negative change in future outlook for economy leads U.S. businesses to begin increasing the rate of layoffs on a small scale, as the beginning of a recession looms in the month ahead.
D 2 August 2008 21 March 2009 Oil prices spike toward inflation-adjusted all-time highs (over $140 per barrel in 2008 U.S. dollars.) Negative change in future outlook for economy leads businesses to sharply accelerate the rate of employee layoffs.
E 28 March 2009 7 November 2009 Stock market bottoms as future outlook for U.S. economy improves, as rate at which the U.S. economic situation is worsening stops increasing and begins to decelerate instead. U.S. businesses react to the positive change in their outlook by significantly slowing the pace of their layoffs, as the Chinese government announced how it would spend its massive economic stimulus effort, which stood to directly benefit U.S.-based exporters of capital goods and raw materials. By contrast, the U.S. stimulus effort that passed into law over a week earlier had no impact upon U.S. business employee retention decisions, as the measure was perceived to be excessively wasteful in generating new and sustainable economic activity.
F 14 November 2009 11 September 2010 Introduction of HR 3962 (Affordable Health Care for America Act) derails improving picture for employees of U.S. businesses, as the measure (and corresponding legislation introduced in the U.S. Senate) is likely to increase the costs to businesses of retaining employees in the future. Employers react to the negative change in their business outlook by slowing the rate of improvement in layoff activity.
G 18 September 2010 Present Possible multiple causes. Political polling indicates Republican party could reasonably win both the U.S. House and Senate, preventing the Democratic party from being able to continue cramming unpopular and economically destructive legislation into law, bringing relief to distressed U.S. businesses. Fed Chairman Ben Bernanke announces Federal Reserve will act if economy worsens, potentially restoring some employer confidence. The White House announces there will be no big new stimulus plan, eliminating the possibility that more wasteful economic activity directed by the federal government would continue to crowd out the economic activity of U.S. businesses.

We've also projected the current trend in U.S. layoff activity in our chart through the end of June 2011. The region between the light purple lines indicating the plus-or-minus one standard deviation from the mean trend line is the most likely region in which the data will fall going forward through that time, absent a break in the current trend.

If the current trend does hold, we can expect new seasonally-adjusted unemployment insurance claim filings to fall in the range between 360,540 and 409,963 for the week of 23 April 2011, the limits of which would then steadily fall by about 2,270 filings each week until reaching a range between 337,835 and 387,257 by 2 July 2011.

Those ranges seem to be awfully wide, but we do have another trick up our sleeve for narrowing down the likely range into which new unemployment insurance claims will fall, which we'll share soon.

Image Credit: MiC Quality

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