If you haven’t been skeptical of the noise factor in month-to-month economic numbers, today’s nonfarm payrolls report from the US Labor Department should change your worldview. Private-sector employment grew by far less than expected: +87,000 in December vs. the previous month and well below November’s hefty 226,000 advance. If we stop there the news looks troubling. But there’s no reason to stop there. In fact, economic common sense strongly suggests that we look beyond today’s discouraging monthly comparison.
As usual on these pages, I recommend watching the year-over-year trend for payrolls, along with numerous other indicators. By this standard, nothing much has changed with today’s release. Private-sector employment increased around 2% (1.96% if go to the second decimal point). That’s slightly below November’s annual 2.09% gain and so it’s fair to say that the data du jour is a touch softer. Maybe that’s a sign that economic growth won’t accelerate this year, as many analysts have been predicting. But in the grand scheme of persuasive data trends, it’s premature to say much beyond the simple fact that the labor market continues to grow at a moderate pace — a pace that continues to remain in a tight range via recent history: roughly 2%, give or take.
Meanwhile, let’s recall that looking at monthly comparisons has been wildly misleading all along. That’s nothing new, and it's a hazard that applies across the board. This is old news, but the danger of focusing on the latest data point is forever lurking in a world where the crowd’s obsessed with each day's data releases. Looking at the numbers without proper historical context, however, is akin to driving with your eyes closed. You may get lucky for a time, but any success is on borrowed time.
If you look at the monthly net change in payrolls in the chart above (the red line), you’ll see that the numbers have continually delivered a wide array of bullish and bearish results. By contrast, the annual rate of change in private payrolls (the black line) has been relatively steady. That’s been a sign that the labor market has continued to heal, albeit with some bumps along the way.
We’re all susceptible to reinventing our economic outlook whenever a widely followed economic report delivers a surprise. Sometimes an attitude adjustment is warranted, but that’s a rare event. In fact, it’s almost never productive to rethink our macro projections (assuming that they’re reasonable) merely because one number shocks the crowd. And, yes, the rule applies even for the all-important employment report from the government.
The solution, of course, is to routinely review a broad set of indicators in search of reasonably reliable estimates of how the business cycle is evolving. Payrolls are a critical input, but even this essential number shouldn’t be analyzed in a vacuum. A far better approach is to look at a broadly diversified set of numbers that collectively serve as a proxy for the broad macro trend. The US Economic Profile that’s updated regularly on these pages is one example; the Chicago Fed’s National Activity Index is another.
The good news is that the broad trend for the economy continues to look favorable, much as it has in recent history. The economy still has a lot of catching up to do when it comes to matching the numbers in the pre-2008 world. But so far the predictions that the economy is about to slide into a new recession have been wrong — an oversight that can be traced to ignoring the overall trend via the numbers. What's more, today’s payrolls data doesn’t change that view, based on the year-over-year trend in private employment growth.
Granted, today’s weak report for job creation in December may be a warning sign. But it could just as easily turn out to be noise. On that note, keep in mind that the ADP Employment Report for December offers a considerably brighter narrative for last month’s labor market news.
One of these data sets is misleading us. All will be clear when the revised numbers are published down the road. Meantime, let’s remember that the key lesson over the last several years with matters of estimating the business cycle has been a tendency in some corners to read too much into one or two numbers. That’s a good way to attract a lot of readers when it comes to writing headlines or getting invited to TV shows, but it’s a deeply flawed way to analyze the economy. The track record on this front speaks for itself.
Yes, we’d all like to know how the economy will fare in, say, six months. But such privileged information is beyond the grasp of mortal minds in real time. The next-best thing is looking to a broad set of data on a regular basis for perspective. The economic outlook is constantly in flux, based on the implied future according to the existing data set. Most of the time, however, the shifting projections are minimal, and for the moment that still applies. When there's a substantial change, for better or worse, you’ll read about it here. Meantime, beware of the usual pitfalls in the game of trying to squeeze blood out of a statistical stone.