Saturday, October 06, 2007

Job Growth? This economy must be hotter than I thought!

Non-farm payrolls grew by 110,000 in September, which is probably a bit below the long-term job growth required to keep up with population growth, usually estimated to be about 150,000/mo. The big story is that August's figure was revised from -4,000 to +89,000. Again, neither increase is impressive, but against the backdrop of a very weak housing market, even decent job growth is most impressive.

Now this doesn't mean the economy is strengthening, particularly if you consider the decline in temporary employment. But it does mean it isn't quite as weak as we thought.

The take away is that the Fed can take a more modest approach to rate cuts, if they so desire. I think the odds of no move in October has risen substantially. Although if you take into account Donald Kohn's comments yesterday...

"We had been holding the federal funds rate at 5.25%, well above the expected rate of inflation, in part to compensate for what had been very narrow yield spreads and readily available credit."

To me that says that Kohn, and likely his colleagues, viewed 5.25% as restrictive with a goal of pushing credit spreads wider. It would seem that they've accomplished this goal, for the moment, and that would leave the door open for more cuts. We'll see.

Meanwhile, there was sure a lot of lawyering going on across the blogosphere. One of the reoccurring themes here on AI is that too many investors act like lawyers, arguing their case from a predetermined point of view, and seeking out facts that support that point of view. Good investors act more like detectives, starting with an open mind and letting the evidence lead them to a conclusion.

Nouriel Roubini and Barry Ritholtz's posts on yesterday's NFP release both smack of lawyering. Both harped on the large increase in teaching/education jobs, which is a legitimate albeit limited point. If changes in the school calendar made measuring teaching jobs difficult, then indeed July and August reports were understated. So the bad news we thought we were getting in those months really wasn't as bad as we thought. I note that neither blogger wrote one word about the education job issue after either the July or August report. (Here's Roubini and here's Ritholtz here and here.)

In both cases, I can't help but feel as though the writer is looking for bearish news to report. When August jobs was reported as negative, both sounded the alarm that a hard landing was coming. But when August was revised higher because of a legitimate discrepancy in the data both bloggers dismissed the revision as a mere data discrepancy. You can't have it both ways. The truth is that the job situation is better than we had thought.

And it isn't even as though this job report disproves the bearish case. Hardly! Employment is usually a lagging indicator first of all, and second of all the weak temporary employment numbers can't be ignored. And most importantly, we need faster job growth to keep up with population growth in the long-term. So if you have a bearish view, this data point won't necessarily coax you out of your cave.

But I think if you really want to make money in the investment game, drop your bearish (or bullish) view. And then examine the data with an open mind. Instead of imposing your own viewpoint, try instead to think along with the Fed. Read what they say, and then read between the lines of their statements. You'll find that your ability to forecast will improve dramatically.


flow5 said...
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Anonymous said...


Please give me the executive summary for non-quantitative souls in need of sleep.

flow5 said...

Do I recall that the jobs data is a lagging indicator?

There's only 2 statistically significant down months in gdp. And then Sept. & Oct. overlap the publication the quarterly reporting data. But I've never known the markets to be that good at discounting.

flow5 said...

Why do people focus on the seasonally mal-adjusted data? Those adjustments can be a source of error as well.

And what kind of comparison can be made without considering economic lags? Month-to-month & Y-o-Y data has alot of proverbial "noise".

flow5 said...
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flow5 said...

The statistics now released by the Board of Governors represent non-conforming data.

Non-conforming data is “subject therefore to the limitations of all analyses based upon broad statistical aggregates, namely, data cannot be compiled accurately or in a manner which conforms to rigid theoretical concepts, and the entire approach tends to be ex post and static.”

Nevertheless an alternative for the demand deposit turnover time series also has a near perfect forecasting record (depending on what you want to predict).

Its replacement doesn't provide as much information as the demand deposit turnover series discontinued in 1996. That is, whereas the ratio of monetary flows (MVt) to AAA corporate bonds in Sept. 81 was .999; it was .998 for 1977 (my reference year).

Monetary flows (MVt) encompass all economic barometers (NFP included). You can’t change the math.

October 2007 is the bottom of the economic downswing. 2008 will be robust.

Identical periods in 1999, 2002, 2003, 2004, & 2005 were stronger than the upcomming 3qtr & 4qtr gdp reports in 2007; though 2007 is far from being as deflationary as 1998, 2000, or 2001.
The money supply "multipliers" began to moderate with the start of the "tight" monetary policy initiated in Feb. 2006. This would imply an ongoing deceleration in prices.

Even though the exchange value of the U.S. dollar has recorded new all time lows, I think the markets reflect significant inflation "expectations". And it is a truism that the "administered" prices would not be the "actual" market prices, if they were not "validated" by monetary flows (MVt).

Average prices have either risen beyond their producers ability to support them, or have been rising at an unsustainable rate.

laurie in maine said...

(IMO!) The phony jobs numbers in August did exactly what they were supposed to do: PUSH THE FED TO CUT RATES. It was what the Wallstreet money people wanted - BAIL OUT 101. It seems like the straw that broke the Fed's back (previous resolve on need for cuts) and pushed the half percent cut over a quarter percent.

I'm blog searching for job number revision explanations and would love someone to ask why revisions (time & time again!) are not questioned.

I'll bet the September jobs numbers are revised down. What do ya' want to bet?!

jf said...

“Average prices have either risen beyond their producers ability to support them, or have been rising at an unsustainable rate.”

I’ve read this in another article. Maybe the fed will explain one of their reasons for lowering the rate was due to the fear of deflation!?

Anonymous said...

The teacher/education issue was discussed on CNBC thoroughly ten minutes after the august number came out. The Fed was clearly well aware of this. The point is that private sector payrolls are still very weak averaging just 50k for the last 3 months. The economy is weak and wait until the debate about seasonal adjustments in the retail sector.

We understand that analysts are lawyering in the short-term. The key is how strong is the argument for each side as the term "lawyering" would suggest.

Anonymous said...

Laurie, check out this blog for an explanation of the machinations and arm-twisting behind the scenes at the Fed.


flow5 said...
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Karl Smith said...

Any thoughts on why Treasuries are drifting lower after what I thought was a pretty dovish set of minutes out of the FED. Not to mention Bill "Hawk" Poole's concern over a housing led recession.

Barry Ritholtz said...

I like to look beyond the headline and take apart the actual underlying data.

You can call that "lawyering" -- misleading though that statement may be -- I prefer to call it data analysis . . .

What I have repeatedly said in the past -- and reiterated in my posts was that any single report doesn't matter all that much; the overall trend is what does:

How does that trend look now?

- In 2006 was 226,000 new jobs created per month
- In 2007, that number fell to 122,000/mo;
- In Q3 2007, that number fell to 74,000/mo.

That's before we look at the Birth/Death adjustments. In the 1990s, these were relatively insignificant. In 2001-02, it was less than 10% of total NFP each year.

After a 2001 change to the format and weighting (effective in 2003), the B/D contribution to NFP went up dramatically. From 2003-06, Birth Death adjustments contributed between 35-41% of the total non-farm payroll job creation. In 2007, the B/D contribution is in excess of 76% of new jobs.


You can rely on the headlines, but all of the fun stuff lies in pulling the data apart to se ewhatss really shakin'



TDDG said...


I don't disagree that job growth is tepid, as I said in the post.

By lawyering, I mean someone who starts with a view and then filters everything through their pre-existing view. I can't say that you are or aren't doing that, because I can't get in your head. And just because someone is lawyering doesn't mean that they're wrong. I just don't think its a good way to invest.