“Essentially, all models are wrong, but some are useful.”
-George E. P. Box



OK kids, gather round for a quick debunking of the usual monthly idiocy. The May Employment Situation report seems to have taken on a special urgency from the carnival barkets, testosterone-poisoned traders, and other ne’er-do-wells working their hardest to separate you from your hard earned Do-Re-Mi.

As we have discussed so very frequently, the monthly change in net jobs is the most over-emphasized, least important highly questionable data point you will find. NFP is a minor monthly rounding error a series subject to the oscillations of both the economy and the data assembly work performed by legions of BLS economists and statistical wonks. It is subject to corrections, revisions and re-benchmarking. It is produced by a model, as so astutely observed by Professor Box, that is wrong. However, it would be foolish not to recognize that the BLS model can be to the intelligent observer who understand context, quite useful.

To achieve that insight, you must acknowledge your inner cognitive idiot, which often creates huge over-emphasis on the most recent data point (“Recency effect”), despite the simple reality that this is one in an ever growing series. Your inner idiot tends to de-emphasize the longer term trend, ignore internal specifics that have often contradictory implications, while failing to understand the difference between a variation above and below trend versus actual signs of a reversal of that trend.

Many (if not most) traders may be wholly unaware of the statistical wisdom the lovely prose above contains, but rest assured that one Ben Bernanke and his deep bench of statistical wizards are not unaware. They know that anyone monthly data point does not a series make.

Those of you who are expecting a wholesale policy shift based on this (or any other) month’s NFP are deeply, disturbingly delusional. You need to put the crack pipe down, stop drinking so early in the morning, and check yourself into rehab if you harbor even the slightest illusion that QE hangs in the balance of the data released at 8:30am today.

Instead, you should be looking at the context in which this report arrives:

1) This is a post-credit crisis recovery which is progressing via a gradual improvement in balance sheets (a “beautiful de-leveraging” to quote Dalio), sub-par GDP growth, anemic job creation.

2) Secular changes in employment — huge improvements in productivity, baby boomers retiring, globalization — have all impacted the overall employment trends, mostly with a negative bias.

3) The US equity markets have had an extraordinary run, tacking on 146% from the lows, based on the natural snapback that occurs when markets get cut in half, recovering profits, government bailouts, and Fed action;

4) Year to date, major US indices have run up 16% over the first five months of the year. This is simply too far too fast and needs to be digested.

With that context, we can look at the soft ADP numbers or some of the other inputs which suggest this may be a so-so report.

Will it be  ‘The Most Important Payroll Release in Years’? If you have been paying attention, you may have guessed not. But then again, I don’t have 24 hours of broadcast air to fill or a quota of blog pages to publish or a daily dead tree to spill ink on and sell to a gullible public.

This joint is called the Big Picture for a reason — my goal is to get you to focus on the 30,000 foot view, think in terms of long arcs of time, preferably years and decades (the astrophysicists and geologists and evolutionary biologists in the audience should feel free to chuckle to amongst yourselves at this). Please pull your foolish primate perspective out of your puny second-to-second existence that unfortunately blinds you to the world passing you by.


BLS report is out at 8:30 am


An Unusually Unusual NFP Payroll Day! (June 3rd, 2011)



* George Edward Pelham Box FRS (18 October 1919 – 28 March 2013) was a statistician, who worked in the areas of quality control, time-series analysis, design of experiments, and Bayesian inference.



Category: Employment, Federal Reserve, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

15 Responses to “THE MOST IMPORTANT EVER NFP blah blah blah”

  1. [...] Ritholtz on why it's not.  (TBP) Share on [...]

  2. eroldictat says:

    Can you say Goldilocks? Not talking about this specific number per se, but overall. Fed is going to be accommodating us for a long, long while…and that’s OK I guess. Certainly OK for now.

  3. MayorQuimby says:

    In poker you play the opposing players not their hands…

  4. Lee Adler says:

    In a similar vein written earlier in the week. Time To Play Wall Street’s Favorite Game wp.me/p2r1d8-FZC

  5. heisenberg991 says:

    Canada is booming with jobs…WTF

  6. rd says:

    Dietrich Dorner wrtoe an interesting book called “The Logic of Failure” in 1989 (translated 1996) looking at recognizing and avoiding error in complex situations.

    It starts off with an agricultural society modeling exercise with 12 participants. Only one participant was able to get through the 10 years of model runs without having a major famine. They note he had no particular technical skills that helped; instead he just thought differently.

    Their observations of the modeling study particpants were that they became more decisive and asked fewer questions as the study progressed and some other key points below:

    1. acted without prior analysis of the situation;
    2. failed to anticipate side effects and long-term repercussions;
    3. assumed that the absence of immediately obvious negative effects meant that correct measures had been taken;
    4. let overinvolvement in specific projects within the model blind them to emerging needs and changes in the situation;
    5. were prone to cynical reactions (I plead guilty to this one!)

    The past 15 years would be a poster child for how the average participant operatedi nthe Tanaland experiment. Today’s focus on the payroll report would fit right in. It is a trading opportunity, not an investing opportunity.

  7. ashpelham2 says:

    Indeed, Mr. Ritholtz, there has been a tremendous amount of build for this report this morning. I almost laughed out loud when I read CNBC’s mobile headline this morning touting it as a seminal moment…Why would it be?

    It’s just continued natural progression of the things you just mentioned. It’s not a quick return or quick fix. This is the healing from a devastating recession that really should have continued from the 2000 stock bubble pop, then was hit in the head by 9/11. But, instead, our ever so intelligent leaders back then decided to drop rates to zero and tell everyone to go shopping. Sheeple….

    Now, if someone could explain to me why the state of California has such oppressively high personal income tax rates?

  8. EdDunkle says:

    Now, if someone could explain to me why the state of California has such oppressively high personal income tax rates?

    One non-trivial factor is Proposition 13. (Take a look at Texas’ property tax rates for comparison.)

  9. [...] I am not going to detail all of the usual factors about NFP. Last month’s critique – THE MOST IMPORTANT EVER NFP blah blah blah — should be reread; You can see the past 1000 or so kvetching posts on the subject of NFP [...]

  10. [...] THE MOST IMPORTANT EVER NFP blah blah blah (June 7th, 2013) [...]