Payrolls Preview: Trim Tabs Disputes Happy Consensus

by: Acting Man

Expectations and Reality

The current consensus on non-farm payrolls growth for July to be reported this Friday is that 183,000 jobs have been created. Most economists have increased their wild guesses due to underestimating the last number. Modern economic forecasting apparently consists of looking at the last two or three data points, connecting them with a ruler, and extrapolating from there. Obviously though, some economists are trying to employ slightly more accurate methods. Regardless though of how accurate these methods are, this does not mean that they will be useful in accurately predicting the official BLS (bureau of labor statistics) number.

This is so because BLS not only statistically massages the data to death, but in addition, employs a medieval data collection method, in spite of the fact that quite meaningful real-time data do in fact exist. Instead of looking at these real time data, BLS sends out questionnaires. This is one of the reasons why it has to revise the data so often. By the time the statistics produced by the BLS that are describing this particular slice of economic history begin to at least approach the actual facts, nobody cares about the numbers anymore.

So we are confronted with a very peculiar problem here: for one thing, trying to forecast the about to be reported number issued by the BLS is akin to throwing dice. Secondly, one has to guess how far away from the eventually reported number all the other guessers will be on average. This is so because the further from the actual number expectations turn out to be, the bigger the market reaction to the number is likely to be. In short, market participants tend to react vehemently to the difference between two wild guesses that really amount to little more than groping in the dark.

To come back to the type of information that is likely to be useful in describing the actual state of affairs (as opposed to the BLS guessing game), Charles Biederman's Trim Tabs e.g. looks at withholding taxes received by the treasury. These represent the most accurate real-time information on developments in the labor market. The treasury isn't going to receive any withholding taxes for the armies of phantom workers that populate BLS statistics due to the 'birth-death model' and the inaccuracies introduced by using questionnaires.

Obviously, companies are only paying withholding taxes for people they have actually employed; they aren't likely to pay taxes for statistical artifacts. Nothing would be easier than collecting these data and using them to estimate recent employment trends – why the BLS isn't doing so is slightly mysterious.

As an aside, the agency has about 2,500 employees and an annual budget of $620 million (as of 2011). The data it produces (employment statistics, consumer and producer price indexes, consumer spending statistics, export-import price indexes) form the main basis for the meddling with the economy the government asserts it must perform in order to improve on the market's alleged 'imperfections'. The result is a permanent retardation of economic progress the cost of which is literally beyond measure – it is a good bet though that it is far higher than the budget of the statistics minions.

Trim Tabs Makes a Dire Forecast

Anyway, we digress. As noted above, Trim Tabs is trying to get a more accurate picture of employment trends with the help of withholding taxes and it says that the data for July look dismal indeed.

According to a report at CNBC:

"Before anyone gets too excited about job prospects for July, a data firm is reporting that payroll growth was much slower than expected. TrimTabs estimated Wednesday that employment slowed to a trickle, with just 23,000 positions added for the month.

That came the same day ADP and Moody's Analytics put private payroll gains alone at 200,000, a number that could drive up economists' expectations that the total economy created 183,000.

TrimTabs bases its monthly estimates on income tax deposits to the U.S. Treasury, and its counts often veer—sometimes sharply—from the government's official total that comes out the first Friday of each month.

In June, the Bureau of Labor Statistics said the economy added 195,000, while TrimTabs put the number at a relatively close 182,000. In May, though, the disparity was far greater, with the government asserting 195,000 while TrimTabs estimated 135,000.

David Santschi, the firm's CEO, attributed the slow July to an increase in mortgage rates that he said slowed the economy. The payrolls number is critical in that it is part of the baseline the Federal Reserve uses in devising monetary policy.

The U.S. central bank currently is creating money to buy $85 billion a month in mortgage-backed securities and Treasuries. Fed officials have said, though, that the purchases likely will be tapered this year if the economic data continue to improve.

Gross domestic product grew a better-than-expected 1.7 percent in the second quarter, according to preliminary figures released Wednesday, though the the first quarter growth was reduced to a scant 1.1 percent. "The economy is much weaker than most investors realize," Santschi said in a statement. "Most Wall Street economists expect the Fed to scale back the pace of money printing in September, but I suspect any changes will be very modest because the economy is so fragile."

(emphasis added)

As can be seen above, the Trim Tabs estimate tells us very little about what BLS will actually report on Friday when it pulls its number out of a hat. Still, the fact that the Trim Tabs number is so extremely low this time opens the possibility that the consensus estimate will indeed turn out to be wildly off course this time around. One thing is already certain: as far as reality is concerned, the Trim Tabs numbers are far more accurate than those produced by the BLS. Once the BLS makes its final data revisions a year hence, they will tend to close in on the numbers Trim Tabs already reported in real time a year earlier.

The 'Olympic Leap' in GDP

Lastly, GDP, which is quite possibly the most useless economic datum ever devised, is likewise going to be revised considerably down the line (it will remain useless even in its revised state). We should, however, point out that U.S. GDP has been altered materially as of this week, adding economic output equal to that of the country of Belgium to U.S. GDP. According to the FT:

"US economic history will be rewritten this week, as the most far-reaching methodological changes in years will add the equivalent of a country the size of Belgium to output in the world's largest economy.

The most important change by the Bureau of Economic Analysis, to be announced on Wednesday, will be to start counting spending on research, development and copyrights as investment, and reflect pension deficits for the first time. Combined they are expected to add 3 per cent to gross domestic product.

The changes – the Olympic Games of economic numbers, taking place once every five years on average – is aimed at more accurately reflecting the modern economy and will make the US the first country to adopt a new international standard.

"We are carrying these major changes all the way back in time – which for us means to 1929 – so we are essentially rewriting economic history," Brent Moulton, who manages the national accounts at the Bureau of Economic Analysis, told the Financial Times in an interview in April.

The scope of the revisions will keep economists busy for months. For example, politically sensitive figures on the size and growth of the US government will change, because the revisions have no effect on past tax revenues. At a time when Republicans argue the growth of federal government is out of control, the revisions are likely to lower federal spending as a share of GDP by half a percentage point. They should also lower federal debt as a share of GDP by about 2 percentage points from 73 per cent in 2012."

(emphasis added)

We have previously discussed why these changes make GDP even more useless than it already is, but obviously the changes are quite good for propaganda purposes – as noted above, 'politically sensitive figures' will be altered by them. Obviously, nothing will actually change in the economy itself - only the vain attempts to 'measure' it are as of now different.