U.S. Payrolls, Seasonal Adjustment, And The 1-Year Filter

Includes: DIA, QQQ, SPY
by: James Picerno

David Stockman points out that last week's news of a surprisingly strong gain in payrolls in December is primarily due to seasonal adjustment. The impressive 292,000 seasonally adjusted surge dwindles to a tepid 11,000 advance in unadjusted terms. He's rightly skeptical about the value of viewing economic data over short-term windows through a seasonally-adjusted lens. What he doesn't mention is that the antidote to noise, at least in part, is the year-over-year comparison. Watching job creation (or the lack thereof) by this yardstick is a useful and generally reliable filter for monitoring the trend. In fact, looking at the latest jobs report in annual terms for raw and seasonally-adjusted results reveals virtually identical gains: roughly 1.9% advances on both counts in December vs. the year-earlier level.

There's still plenty to worry about for the future path of the US economy, but for the moment, the reality about payrolls is that nothing much has changed. In other words, many of the extreme views - pro and con - that we've read over the past several days are overbaked. When we ignore the monthly change and the seasonal adjustment, it's clear that the annual pace in December effectively matches November's increase for one-decimal-point comparisons. There is, however, a slow but steady descent in the annual rate of growth. That's a sign that the recovery is aging. But making the leap from respectable but decelerating growth in the here and now to clear evidence that the "economy is dead in the water," as Stockman asserts, is a stretch, at least if the latest payrolls report is considered Exhibit A in the indictment.

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Yes, there are any number of threats stalking the US economy and it's been obvious for some time that the labor market's recovery is, by several metrics, weaker than usual relative to history. But reasoning from a monthly perspective - whether in adjusted or unadjusted terms - is still a flawed concept, for bulls and bears.

But pessimists and perma-bears needn't worry. There's still the old claim to fall back on - it's all a con and so you can't believe the official numbers, with or without seasonal adjustment. But such a radical view comes at a price, i.e., you can't invoke government figures to claim that the economy is stumbling.