Job Growth? This Economy Is Hotter Than I Thought

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Includes: DIA, QQQ, SPY
by: Accrued Interest

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.