By Sheraz Mian
Looking at the market’s reaction to this morning’s payroll numbers -- equities and dollar down, Treasuries and gold up -- you would think that the bottom was falling from the U.S. economy. I see no evidence in today’s report that would justify such a glum mood.
In fact, I see more positives than negatives in today’s report about the direction of the U.S. labor market and the underlying economy. As such, I am looking forward to a turnaround in sentiment as today’s report is reassessed going forward.
So, how significant is a headline miss – 85,000 jobs lost vs. a consensus expectation of 35,000 jobs lost?
It is a non-event, if you ask me. Here is why:
There is nobody out there who doesn’t agree with the assessment that we are at or very close to an inflection point in the U.S. labor market. While forecasting is difficult even in the best of times, it becomes almost impossible in situations where the overall trend is shifting, as everyone agrees is the case with the U.S. labor market at present.
We should keep the size of the labor market in mind as well when we are discussing monthly swings. Even after losing over 7.5 million jobs since December 2007, the total size of the labor market (civilian labor force) exceeds 130 million. Not to make light of a variance of 30,000 to 40,000 jobs -- after all, these are jobs we are talking about -- but their overall significance pales when compared to the full market.
There are problems with reading too much into the comparison of the monthly released payroll number with the consensus expectation number. It is completely different from comparing a public company’s reported quarterly earnings with the consensus estimate for the same. Trust me, we know consensus forecasts; we at Zacks actually helped create the consensus earnings forecasts way back in the late 1970’s.
Companies almost never revise their earnings after they are released (I did say ‘almost’). But the Bureau of Labor Statistics (BLS) almost always revises its monthly payroll numbers. Many times, the final revision is completely different from the initial release number.
Even in this report, we saw that the initially released November job loss number of 11,000 was revised to a positive gain of 4,000 jobs. Incidentally, the revised November gain was the first positive job growth since December 2007. Given this, today’s report is unlikely to be the final word December 2009 employment numbers. It is very likely that the final revision could be completely different from this number, as we saw in the case of November.
We don’t need to dig deep to see clear evidence of favorable trends in this report as well as elsewhere in the economy. Of particular significance in today’s report is the positive trend in the creation of temporary jobs, which is a solid leading indicator for the labor market. A total of 47,000 temporary jobs were created in December, which takes the number of such jobs created since July to more than 160,000. A small number, no doubt, relative to the size of the labor market, but clear evidence of movement in the right direction.
Other recent reports on the health of the economy have been in the neutral to positive category. While I would put the non-manufacturing ISM report in the neutral category, the manufacturing ISM and retail sales numbers were clearly positive. Many retailers, such as Best Buy (BBY) and Sears (SHLD), have been reporting solid results and raising outlooks.
Bottom line: there is no reason for the market to read anything more negative in today’s report than it didn’t already know. The consensus view is that this will be a jobless recovery. I see a lot of merit in taking a counter-view to this consensus position of the labor market, but if anything, today’s report shows a slowly improving labor market.
Hardly a reason to be glum, particularly on a Friday, even if you do happen to be in the midst of awful weather.