Should we put so much weight on NFP? Statisticians suggest "probably not."
The WSJ lays the blame for the latest obsession (in part) at the feet of Fed Chair Bernanke:
"Yet from a statistician’s point of view, the market’s reaction to the jobs data is hard to fathom. Over the past six years, the economists’ consensus has missed the reported number, on average, by about 82,000 jobs, according to Bianco Research. That might look like a big difference. But as a percentage of total payroll employment — 135 million — it’s actually very small, less than one tenth of 1%. Because some miss is always expected, it would take a much bigger divergence from Wall Street’s expectation — say a number of more than 200,000 above or below consensus — to be meaningful, says David Juran, a statistics professor at Columbia Business School.
For a while, it seemed that the bond market had come to its senses. At the end of last year, according to Bank of America, the sensitivity of bond prices to the jobs report had fallen sharply. Now, though, the Federal Reserve’s new chairman, Ben Bernanke, has stated that future monetary-policy moves will depend on changes in economic data. Hence, like it or not, traders — and Wall Street economists — will be glued to their screens this morning. "If I’m a trader I have to trade off of it, because everyone else does," says Paul Kasriel, chief economist at the Northern Trust Co. in Chicago."
Interesting stuff, though I have two criticisms:
First, The Street has been fairly obsessed with NFP for years, so its not really fair to lay all the blame on Bernanke. I read his "Data Dependant" schtick as a ready excuse for doing what he wants to do anywway. This is especially the case, given what we know about how subject to revision this data is, and how long it takes for the Fed’s action to be felt in the economy.
Second, the statistical take given above is glib and misleading — Yes, its true that the average miss of 82,000 jobs as a percentage of total 135
million payroll employment is small, less than one tenth of 1%.
But we track NFP to ascertain how many new jobs are being created within the economy. That provides insight into how robust the cycle is, how much money consumers will have to spend, etc.
A miss of 82k per month — when the trailing 12 month average of new jobs created is about 175k per month — is off by a huge percentage: ~47%.
WSJ, March 10, 2006; Page C1
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