Yes, it is once again time for everyone’s favorite economic indicator, the amusingly described "Employment Situation," aka Non-Farm Payrolls. Consensus is for a weak 80,000 new jobs, with the range of estimates running from 10,000 to 110,000.
In the past, I have harped on some of the niggling details of this report: The Birth/Death adjustment; The "Not-in-Labor-Force" (NILF), overall trend heading lower, and wages relative to 4.5 4.6 4.7% Unemployment rates.
My other macro concerns about this have been the NFP gains relative to population growth (0.894%, according to the CIA), and the current jobs recovery relative to past cycles.
Before the 8:30 release of this data, let’s review some of these issues, to help contextualize today’s numbers.
1. The Birth/Death adjustment: This was formerly a minor adjustment accounting for new businesses that has morphed into a major accounting headache. After the 2001 change to the B/D methodology, this previously minor contributor to NFP data has mushroomed into the dominant factor in NFP growth.
That’s problematic, because unlike the rest of of NFP data, this is not actually measured — i.e., not counted payroll data — but rather is an extrapolated hypothesis.
As the following chart shows, it has taken over the BLS model to the point where NFP data is now dominated by this guesstimate; That suggests tom the data is increasingly likely to be increasingly inaccurate.
As Paul Kasriel of Northern Trust shows, at nearly 80% of new job creation, the B/D adjustment is the Blob that has taken over the entire town:
2. Slowing NFP Trends: You can ignore any given NFP report; You cannot ignore the overall trend from year to year. As we noted last month, the trend in the average monthly job creation is not encouraging:
– In 2006 was 226,000 new jobs created per month
– In 2007, that number fell to 122,000;
– In Q3 2007, that number fell to 74,000
We can and should ignore any single outlier month; but its clear the overall pace of job creation is on the downslide.
One of our favorite leading job indicators gets mentioned in today’s WSJ. They observe that:
Temp jobs are down roughly 70,000 from a year ago, the biggest decline
in roughly five years. Construction employment held up in the 2001
recession, but was an important leading indicator before the 1990
recession. It is down more than 100,000 from a year ago, and it’s hard
to imagine that turning higher anytime soon.
3. Population Growth: The number of people in the US keep growing: 300 million, with a very high birth rate for an industrialized country, lots of legal and illegal immigration. If the population grows near 1%, that’s 3 million new people in the USA each year. Almost two thirds are working folk — immigrants and recent grads. (grads coming into the labor force are equal to a percentage of newborns)
Do the math, and you find that the economy needs about ~150,000 new jobs merely to keep
up with this population growth.
Whenever you hear someone on TV describing 110,000 new jobs as "robust, you know you are watching someone who is either a) innumeric; 2) an idiot; iii) a liar; IV) some or all of the above.
4. The Labor Force Participation Rate: Post 2001 recession, the labor Force bounced back, but then got wobbly, contracting from 2003-04. This looks to me like a soft landing, as the Fed successfully avoided (or at least delayed) the dreaded double-dip recession.
The run up from 2004-06 was very likely in large part Real Estate related — including RE Agents, Mortgage brokers, Construction/Contracting, etc. As Real Estate began to slow, and the crumble, we’ve seen the Labor Force contract significantly. This explains the low 4.6% unemployment rate: Many of these self-employed or independent agents simply left the workforce.
See the Economagic chart below:
5. Historical Job Recovery Cycles: We’ve been harping on this for quite a while, but here we go again: This continues to be one of the weakest post recession job recovery cycles on record. Whether thats due to the mild nature of the last recession, the unusually high job creation of the 1990s, or some other factor is arguable.
Regardless, since WW2, we haven’t had a worse set of data during the actual recovery phase. I came across an interesting pair of charts came from EPI. These will look familiar to long time readers of TBP:
You now have enough background to place the overall data into context . . .
Sources:
No Recession in Sight – If You Are Nearsighted
Paul L. Kasriel
Northern Trust Global Economic Research
October 12, 2007
http://tinyurl.com/33brp4
Job Outlook: Perhaps Weaker Than It Looks
JON E. HILSENRATH
November 2, 2007; Page C1
http://online.wsj.com/article/SB119396534983980011.html
Bragging on historically weak job growth
Jared Bernstein
October 5, 2007 | EPI Issue Brief #237
http://www.epi.org/content.cfm/ib237
” This continues to be one of the weakest post recession job recovery cycles on record. Whether thats due to the mild nature of the last recession, the unusually high job creation of the 1990s, or some other factor is arguable. ”
This post recession recovery has been fueled by deficit spending by the government and its citizens. Who needs a job when you can live on infinite credit.
It’s all good Barry.
All excellent points, but in the end, just like the GDP figure, the headline of 166K will cause people to react, much like insects to light. To look into the “quality” of the figure requires too much thinking for 99% of the population. They’d rather watch a football game, read about Britney Spears or go spend someone else’s money and feel rich as debt no longer matters to most.
According to businesses, up 166K. However, higher-paying manufacturing and construction down, up in government and service areas which are likely to be lower paying.
According to the household survey, it continues indicate job losses. Not quite as reliable as the business survey but maybe an indicator of a turning point.
Stuart’s right, initial knee-jerk reaction is always based on the headline, not on the actual quality. Very sad!
CNB-shit, really pumped the heck out of the jobs report. Of course they can do so now when the direction of the market isn’t perfectly clear. But come next month, and early 2008, it will be a much harder task. Like one of the rational pundits mentioned: businesses take awhile to turn their ships onto a better tack…(paraphrase mine).
Barry, what do you make of the BLS revisions coming more in line with the ADP report as of March 2007? If the trend continues, it suggests we will see some serious downward revisions of the employment situation.
Cost of labor in the US is very low when you adjust for the depreciating dollar. It shouldn’t be surprising that employment is holding up.
We read it. We are just waiting for the trickle down from Wall Street.
yep, re: Logic, wage costs look low in the US compared to the UK (in fact everything looks cheap in the US compared to the UK…).
Your minumum wage is $5.85/hour, the UK minimum wage is the equivalent of $11.50/hour. Your lower $ will quickly attract capital to the US from abroad (indeed, I have changed most of my £ into $ above 2.00 as the UK and Sterling have even larger bubble dynamics than the US ever had, just nobody chooses to look at them…yet).
engerland, bingo. That’s one of the primary reasons for the unstated “unofficial” policy of letting the dollar drift lower. Officials can never openly state they want a lower dollar, it’ll plummet overnight, but quietly this is why they really do want it lower IMO.
I call it the BKI or “Burger King Index”
because that is about all it seems to represent.
Ciao
MS
In extensive modelling I’ve found the only component of employment/unemployment that has a strong and consistent relation to the overall economy is the year-over-year percent change in “job losers not on temporary layoff” from the household survey. This represents people who have involuntarily lost jobs and are looking for new ones.
For the past five months this has been exploding with Y/Y percent changes of
5.6% 12.1% 11.7% 13.0% 22.2%.
This has never been observed except just before or just after the start of an NBER defined recession. The graph of this series is quite striking. One can easily chart the series at the BLS site
http://www.bls.gov/webapps/legacy/cpsatab8.htm
I can’t link directly to the chart because it is dynamically generated.
Other unemployment components (new entrants, re-entrants, job leavers) are driven by other factors sucha as population demographics as are “discouraged workers”. “Temporary layoffs” was a great indicator when the U.S. was an industrial economy but is so no longer. Surprisingly, new employment is a weak indictor.
A roughly comparable and equally useful measure is the smoothed 12 month percent change in continuing claims (a favorite of Paul Kasriel). This has also bottomed and is increasing.
So the final question would be what does the trend mean for the market and how do we profit from it. There are those in the camp that weaker job markets force the fed to bail us out, and others that view a weak jobs marekt as an unhealthy economic indicator.
I have my thoughts for the long term, but often it appears the market is somewhat counterintuitive in the daily evaluation of new information.
Thanks for the good read,
Zach
An excellent summary post and overview. Becomes the goto link for illustrating and defining the problems with reported employment. Appreciated.
An excellent summary post and overview. Becomes the goto link for illustrating and defining the problems with reported employment. Appreciated.
An excellent summary post and overview. Becomes the goto link for illustrating and defining the problems with reported employment. Appreciated.
An excellent summary post and overview. Becomes the goto link for illustrating and defining the problems with reported employment. Appreciated.
Barry
I suspect one reason Labor Force Participation is going down is because many baby boomers are retiring early. Yes, most folks have not saved and invested enough and will need to work longer than they would like. There are many however who have. I would be curious what percentage of your readers fall into the latter group. (I do)
Barry–I’m echoing another commenter, which is to ask what do you think this all means? Love to get your interpretation.
Next point is that your comment in 3. Population Growth was no doubt unintentionally misleading. You wrote that when someone…says payroll job growth of 110,000 is robust, they are a liar etc.
Aren’t you being unfair because there is another source of job growth beyond the payroll survey. Shouldn’t you also include growth in the household survey too? This month the household survey fell, but it has frequently had higher job growth than the payroll survey. Isn’t that where the slack gets taken up?
I cannot tell Who has their Head Up Their Ass further on this Jobs Report. Kudlow or Cavuto…At least Kudlow had Jim Rogers on his show (who was also on Bloomberg for the same reason) to put the LIE to these numbers…
Cavuto’s Head is the size of a Pumpkin… so I suspect it will not fit into his ass without a considerable amount of (Existential) Pain. So I’ll wager on Kudlow.
Then, along with Legg Mason’s Bill Miller, we have some (Honest) rec’s to Buy the Financials and HomeBuilders…(any likelihood of a Recession now being averted because of the strong job numbers…)
I guess since the CEO of Citigroup is now offering up His resignation, that Merril Lynch continues to have valuation problems/writedowns with their Mortgage Related Securities (which has now gotten the attention of the SEC)… and their CEO has resigned, the ongoing SubPrime Mortgage Mess/Credit Crises (which most CERTAINLY WILL NOT rear it’s Head at the likes of Wachovia, WaMu, Bear Stearns, JP. Morgan-Chase and/or GoldMan Sachs) and the ahh ‘Downturn’ in Housing has again bottomed, …it’s “all priced into the Market”…it’s time to buy these stocks…
Let’s see. Oil now at nearly 96 dollars per barrel. NatGas/ Heating Oil on the Move…Stock Market becoming increasingly psychotic, speculative, and volatile…
I can’t help but wonder what happens when our fellow consumers see a “4” (and change) or a “5” (and change) on those Gas Station Signs as they head out to the Malls in their OPEC friendly SUV’s in coming months…
Employment Report Disinformation
Each month the market reacts to the employment situation report, consisting of a survey of establishments and a survey of individuals. There is a lot of information and the methodology is complex. This creates a great opportunity for spinning the
Test Your Skill: Interpreting Economic Commentary
How good are you at interpreting economic commentary? What if the statement is strictly factual? Can you tell fact from fiction? If not, you are poised to lose money to those in the know. Interpreting Job Growth The non-farm payroll
if someone calls a non farm of 110 robust
they are a liar
or the fed cheerleading for the economy
the fed is trying to say that we only need 100k a month to keep the economy growing
therefore 125 is a robust report or as janet yellen says the labor market is going gangbusters