When it comes to the Non Farm Payroll data, I have been taking "the Under" for several years now. The bet has been "money" in the bank month after month.
This is the month I take "the Over." And likely next monthy too. In fact, I may take the over for the next 4 NFP in a row.
Not because the job market is so great — to the contrary, its been mediocre, and is running at a sub-par basis over the past 1,3 and 5 years. While economists have been comparing the present cycle with the 1994/95 cycle, I find that comparison wanting. Northern Trust’s Asha Banglore observes that "Payroll employment has grown between 1.2% and 1.6% on a year-to-year basis since the Fed started raising the federal funds rate in June 2004. This compares with payroll employment growing between 2.5% and 3.5% in the twelve months ended February 1995."
Hardly a house afire. What’s worse is that the growth sectors are primarily lower paying service industries (Food service, retail, hospitality). The prime exception has been construction, which has been hot Hot HOT! and pays much better wages.
The reason I am taking "the Over" is due to accounting. You see, starting in April, we get the prime months when the BLS performs that sleight of hand magic called the Birth Death adjustment. These few months seem to be the major upwards estimates (*January and July are the negative months).
Where aas Non Farm Payroll is a specifically measured count of employees at FICA paying/reporting firms, it represents a true measured form employment data. (Compared to Household survey, which is a softer data source — they "ask people" about their work, rather than actually recording hard tax data).
The relatively clean NFP data collection moves a bit towards the theoretical with this B/D adjustment. The methodology of the Birth Death Adjustment is a hypothesis, a best guess. "We think that the economy created this many new firms, and those firms which are so new they are not yet in our database, created this many new jobs."
Since we are big into the guesstimates this month, I’ll make my own:
I guesstimate that about 100k new jobs will be added to the NFP report
each month due to this ledger domain.
Add to that the Katrina relocatees, who finally started showing up in the
data last month, and you have a recipe for a hot couple of NFP
numbers. The B/D adjustment gets figured into the total numbers, not
just the monthly — but most of economics takes place at the margins,
and this can have a significant impact.
Hence, the Over.
The New York Post’s John Crudele states it thusly:
"What is happening is much simpler (and, in a way, more inister): starting
with the March number to be released Friday, the government starts making
optimistic assumptions about hiring spurts caused by new companies coming into
The government will assume that around 200,000 jobs a month are being created
by new companies in the April, May and June report.
If the next four jobs reports reflect the seasonal abnormalities that I think
they will, then the markets will be soon expecting a whole lot more rate hikes."
Crudele expects the Fed to buy into the numbers, and keep raising rates. I suspect they may be more heavily weighting the wage growth, rather than total employment numbers — and will keep raising rates.
A look at actual job growth on a year over year basis, however, reflects that things are somewhat less rosy than the BLS data may imply:
All Employees: Total Nonfarm
% Change – Year to Year NSA, Thous
Source: Northern Trust
While the growth is better than 2001-2003 (pre-1% Fed rates), it is still much weaker than the 1994/95 period.
Unfortunately, 1.3% growth fails to keep up with the nations population growth. In other words, as a percentage less people have jobs relative to the total population. Note that some of these missing jobs are also unregistered illegals — a guest worker program will result in a readjustment of this data.
Bottom line: I expect a strong NFP number, and that should make people believe the Fed will keep tightening. These days, the market is juts as likely to shrug it off.
*Its not all upwards revisions: In January and July, the Bureau presumes
that firms that could not make it are closing their doors; The past 3
Januarys saw Preliminary Estimates of B/D adjustments of Jan 2005 -280,
Jan 2004 -321, and Jan 2003 -211 (Note that Q2-Q4 get revised)
Now vs. 1994/1995 – Part I
Northern Trust Global Economic Research, April 04, 2006
Historical Net Birth/Death Adjustments
INTEREST RATES WILL WHACK THE MARTS FRIDAY
NYPost, April 4, 2006
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