The headline sounds very optimistic. However, this is more because employment numbers have been so bad than because they are suddenly so good. The good employment report for October, even if repeated every month going forward, is actually only a "treading water" event. Much larger employment growth is needed to start recovering employment levels from before the Great Recession.
The BLS (Bureau of Labor Statistics, U.S. Dept. of Labor) produced their October 2010 employment report showing last month 151,000 jobs were created while the unemployment rate remained unchanged at 9.6%. Jobs growth over 150,000 is good news: It means jobs growth is approximately equal to the growth of the working age population.
The spike was in private sector non-farm payrolls which rose 159,000. Government payrolls were almost unchanged. This is the largest MoM increase since April 2010's 241,000, and prior to that we must go back to March 2007's 213,000 increase. Since 2000, monthly growth this large or larger has only occurred 18 times. And literally this entire October 2010 job growth is in private sector service industries.
Before trotting off into a diatribe analyzing non-farm payrolls, we should take a quick view of the various unemployment measures as determined by household survey. Note, the "all in" U-6 unemployment number declined by a fraction.
Now for a little analysis as the BLS data is very noisy, and uses all sorts of models and guesses to produce their data which degrade its month to month accuracy. Econintersect uses ADP employment data as a check. ADP released their data earlier this week showing only a 43,000 employment increase in non-farm private employment. The following graphs tell the story on the differences:
In 2010, there is a growing disconnect between the ADP and BLS data. The table below shows the differences in the last three months;
Here is a sampling of how the pundits' forecasted the jobs report.
From 'A Dash of Insight':
My answer to this question is not a forecast, per se, since we do not posit any causal relationship among the variables in our model. They are all concurrent indicators of economic activity.
- We use the four-week moving average of initial unemployment claims, culminating in the week of the employment survey. This is the best direct indicator of new job losses. This is about the same as last month --- 459K versus 464K. This value has declined significantly from the five-handle that was so worrisome a few months ago, but is still at levels that do not indicate a real recovery.
- We look at the University of Michigan sentiment survey, which we find to be more useful than the Conference Board's sentiment index. Michigan uses a panel, where some families are carried over from month to month. This is a good technique. Sentiment is strongly influenced by employment. When people have lost jobs, or know others who have, they get worried. It is a very good concurrent indicator. The Michigan index was down a touch (after a sharp decline in July) to 67.7, down from 68.2 last month.
- We use the ISM manufacturing index. This is 56.9, a surprising uptick from 54.4 last month. The ISM index is an important read on employment, and it remains the most bullish of the various indicators. Most people do not know much about interpreting this index. The October reading, if annualized, is consistent with GDP growth of 5%.
Our long-term preview record has been very good, especially when compared to the final revised data. This makes sense because our model was derived from the final data. Our approach also makes logical sense, because it involves some factors related to jobs lost, and some related to job creation.
For the current month, our estimate is for a loss of 65,000 jobs. This is a very pessimistic estimate, weaker than the other sources.
Trimtabs predicted a growth of 95,000 jobs.
I would have also guessed 60,000 based on the initial unemployment claims. Yesterday John Lounsbury presented a graph that suggested, based on how ADP and BLS data has correlated over the past year, that there was a 50% probability that private sector Non-Farm Payrolls would come in between +25,000 and -60,000. This is more in line with 'A Dash of Insight' than with the other estimates.
Obviously the October relationship between ADP and BLS numbers has deviated greatly from the pattern of the last year. Whether there is any meaning in this correlation over longer periods of time deserves further study.
The weekly unemployment claims data released this week showed a slight increase this week - remaining over the 450,000 magic number which historically indicates little jobs growth. Econintersect follows the 4 week moving average as the seasonal adjustment factors are not exact, and the four week moving average does a good job of smoothing out the anomalies. The Department of Labor should be commended for the best seasonal adjustment methodology for any economic indicator.
The last word belongs to the National Federation of Independent Business whose press release timed for the release of the BLS employment report stated:
Although the economy has been growing for over a year now, most firms have not increased employment and many have eliminated jobs. In October, 10 percent (down three points) increased average employment by 4.5 employees, but 15 percent (down one point) reduced their workforces by an average of 2.9 workers. The average change in employment per firm improved from negative .26 workers per firm lost in September to a 0 reading for October, a substantial improvement.
The percent of owners with unfilled (hard to fill) openings fell a point to 10 percent of all firms, historically a weak showing. Over the next three months, 13 percent plan to reduce employment (down three points), and 8 percent plan to create new jobs (unchanged), yielding a seasonally adjusted net 1 percent of owners planning to create new jobs, 4 points better than September. Although expectations for business conditions and real sales trends improved in October, it wasn’t enough to produce a surge in job creation plans which remained mired at recession levels. The NFIB labor market indicators are underperforming all recovery periods since 1973.
The cautionary comments above from the BLS do throw some cold water on our more optimistic headline.
Disclosure: Portfolio completely in cash.