Looking For 'Strong' Payrolls

 |  Includes: DIA, QQQ, SPY
by: Alhambra Investment Partners

By Jeffrey P. Snider

Before getting into the details of the monthly payroll frenzy, the idea of a "strong" jobs report needs to be addressed. The headline for ABC News was, Stocks Are Mixed Despite Strong US Jobs Report, while Forex News topline said, US Dollar Firms after Strong Jobs Report. As if each media outlet were simply copying from each other, everywhere you look the word "strong" is bandied about as if it were gospel.

The average monthly change for the past 12 months is 180,000 for the Establishment Survey, which means, among other things, February's "strong" number was on its face below-average. If we view that in comparison to previous recovery periods, that number cannot be expressed as "strong."

The early 1980s saw monthly job growth that, on its own without adjusting for population, was far greater. If we adjust these figures for population growth, the only year close to what we have seen of the "strong" job gains of the past twelve months was 1986 - which was a near recession.

The only real comparison is both 2004 and 2006. That is very far from what should be considered "strong." And that is particularly true if these results were further scaled to the job losses in the recessions that preceded them. Instead, the focus on month-to-month changes and how it relates to economists' highly inaccurate expectations is greatly misleading, and it conforms to the intentional reduction in the standards by which the economy is to be judged.

As for the dichotomy between the two BLS payroll surveys, that continues to be apparent and should be concerning relative to the future direction.

This separation is interesting since the two surveys have been extremely close in representations since 2000. And that was also true of the current "cycle" until October 2012.

Again, that is highly unusual, particularly looking backward to the pre-crisis period. For the most part, the two surveys were in lockstep.

On closer inspection of 2007 there does appear a bit of this divergence. In that case, the Household Survey outpaced growth in the Establishment Survey at the tail end of the housing bubble, but then noticeably undercut that growth all the way into the Great Recession.

In that one instance, 2007 looks very much like 2013-14 where there is a divergence but both surveys are still showing modest, but positive, and very uneven growth. This is not dispositive of anything, but it offers potentially one explanation for the divergence we see now as it very well could indicate a phase shift in labor markets (which would be consistent with almost everything else post-2012).

The other major factor in the payroll report has been the labor force growth, which has been negative to slow for several months dating back to the middle of 2013. The last few months have seen a recovery, but not even close enough to where it "should" be given what these "strong" observations are declaring.

And it is not at all unexpected to see volatility like this in the Household Survey (from which the labor force is derived). The trend since October 2012 is still intact and we may have hit a lull in the deterioration, an ebb in an otherwise durable flow. There is no such thing as linear trends (outside of stock prices?).

Finally, there was decline in the average hours worked which is something that demands further observation, as declining hours is typically (should it develop into a trend) a precursor to further erosion in labor markets. Overall, wage growth is better than early 2013, a very low standard of comparison, but still as slow and deleterious as we have seen since the middle of 2012, that too is no surprise.