Job Growth? This Economy Is Hotter Than I Thought

Non-farm payrolls grew by 110,000 in September, which is probably a bit below the long-term job growth required to keep up with population growth, usually estimated to be about 150,000/mo. The big story is that August's figure was revised from -4,000 to +89,000. Again, neither increase is impressive, but against the backdrop of a very weak housing market, even decent job growth is most impressive.

Now this doesn't mean the economy is strengthening, particularly if you consider the decline in temporary employment. But it does mean it isn't quite as weak as we thought.

The take away is that the Fed can take a more modest approach to rate cuts, if they so desire. I think the odds of no move in October has risen substantially. Although if you take into account Donald Kohn's comments...

"We had been holding the federal funds rate at 5.25%, well above the expected rate of inflation, in part to compensate for what had been very narrow yield spreads and readily available credit."

To me that says that Kohn, and likely his colleagues, viewed 5.25% as restrictive with a goal of pushing credit spreads wider. It would seem that they've accomplished this goal, for the moment, and that would leave the door open for more cuts. We'll see.

Meanwhile, there was sure a lot of lawyering going on across the blogosphere. One of the reoccurring themes here on AI is that too many investors act like lawyers, arguing their case from a predetermined point of view, and seeking out facts that support that point of view. Good investors act more like detectives, starting with an open mind and letting the evidence lead them to a conclusion.

Nouriel Roubini and Barry Ritholtz's posts on Friday's NFP release both smack of lawyering. Both harped on the large increase in teaching/education jobs, which is a legitimate albeit limited point. If changes in the school calendar made measuring teaching jobs difficult, then indeed July and August reports were understated. So the bad news we thought we were getting in those months really wasn't as bad as we thought. I note that neither blogger wrote one word about the education job issue after either the July or August report. (Here's Roubini and here's Ritholtz here and here.)

In both cases, I can't help but feel as though the writer is looking for bearish news to report. When August jobs was reported as negative, both sounded the alarm that a hard landing was coming. But when August was revised higher because of a legitimate discrepancy in the data both bloggers dismissed the revision as a mere data discrepancy. You can't have it both ways. The truth is that the job situation is better than we had thought.

And it isn't even as though this job report disproves the bearish case. Hardly! Employment is usually a lagging indicator first of all, and second of all the weak temporary employment numbers can't be ignored. And most importantly, we need faster job growth to keep up with population growth in the long-term. So if you have a bearish view, this data point won't necessarily coax you out of your cave.

But I think if you really want to make money in the investment game, drop your bearish (or bullish) view. And then examine the data with an open mind. Instead of imposing your own viewpoint, try instead to think along with the Fed. Read what they say, and then read between the lines of their statements. You'll find that your ability to forecast will improve dramatically.

Comments

[David Roskoph:]

Does anyone wonder about the revision game being so wild? How can anyone trust such information or its source?

2007 Oct 08 02:54 PM

[Accrued Int...:]

I think that's why serious economists/traders/inv... don't put much weight in any given economic release.

2007 Oct 08 05:11 PM

[ritholtz:]

I like to look beyond the headline and take apart the actual underlying data. You can call it "lawyering" -- misleading -- thought that statement may be; I prefer to call it data analysis . . .

As I have said many many times, any single report doesn't matter, the overall trend does:

- In 2006 was 226,000 new jobs created per month
- In 2007, that number fell to 122,000;
- In Q3 2007, that number fell to 74,000.

That's before we look at the Birth/Death adjustments. In the 1990s, these were relatively insignificant. In 2001-02, it was less than 10% of total NFP each year. After a 2001 change to the format and weighting (effective in 2003), the B/D contribution to NFP went up dramatically. From 2003-06, Birth Death adjustments contributed between 35-41% of the total non-farm payroll job creation. In 2007, the B/D contribution is in excess of 76% of new jobs.

~~~

You have misconstrued my comments, and ignored the main point -- (Sounds like some "lawyering" on your part!)

Regards,

BR

2007 Oct 09 06:08 AM

[Accrued Int...:]

Well, we can certainly agree that the trend is what matters and that statistics should only carry as much meaning as their accuracy!

2007 Oct 12 08:13 AM

[toddpw:]

In Soviet America, economic data falsifies YOU!

Seriously though, the more I learn about the economic data reports, the less I trust them. They've redefined unemployment, inflation, etc, to the point where more attention is paid to the RPM of the engine than to the actual distance we're traveling.

One wonders just how much consumer spending is now coming from the uber-rich -- if they all buy new yachts, that pumps up GDP so who will notice if the poor are now starving because of food and energy inflation.

But suppose consumer spending did tank here -- with all the blue chips globalized now, would the stock market even notice? Just long enough to predict another Fed rate cut, I bet.

The biggest Ponzi scheme in history is almost over, my friends. Helicopter Ben Bernanke bailed out his Wall Street buddies and gave them time to get out, while the retail investors are all told to buy on dips because the economy is strong.

2007 Oct 10 07:23 PM