We get the Non Farm Payrolls report today. Expectations are for an increase in NFP to rise 165,000, following April’s gains of 244,000.
But there is an unusual amount of hair on that number, as I shall explain shortly. Indeed, today is an unusually unusual NFP report.
For one thing, the economy’s growth rate is slowing. As we saw last year, this can generate a significant over-reaction amongst traders. Every weak data point is a double dip; every soft number heralds the next recession. So as the world’s economy cools, economists are left to grapple with questions they cannot answer prospectively. Are businesses slowing hiring to restrain labor costs? Are executives losing confidence? Is consumer spending slowing?
For another thing, the markets seem to be unusually twitchy lately, with the Dow up 140 points on Tuesday, and down 280 points on Wednesday.
Then there is the ADP private payroll number. It was enormously disappointing. But as we noted yesterday, ADP’s job data reliability is not especially great. Indeed, given their large firm bias, I would expect it to less than ideal during the early portions of the economic cycle, when job creation is driven by start ups and smaller firms.
Lastly, there are some twitchy technical factors that will make this months NFP number a challenge to dissect. The big 244k April number involved a 5 week month. The way BLS picks this up may have caused April to steal some thunder from May.
Then there is the Birth Death number. On a calendar basis, it has been huge in May. Last May, the B/D adjustment added 192,000 jobs tot he 143 million total.
I have been critical of a major flaw of the B/D adjustment — it tends to dramatically overstate job creation late in the economic cycle (think 2005-07). But its purpose is to compensate for the Establishment Survey’s big firm bias. Like ADP, it tends to understate job creation in the recovery portion of the cycle.
Finally, there is the crapshoot of how traders will view the employment report. Is bad good because it could induce more Fed intervention? Is good really bad because it postpones QE3?
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