October 5, 2007
Gilda Radner's Emily Litella on the Saturday Night Live of yore used to respond with a sheepish "Never mind" when proven wrong. That roughly approximates our reaction to this morning's September employment report.
It turns out that the initial jobs report for August was wrong, and by more than a little. You may recall that the government's first report for August showed the first net loss (-4,000) in nonfarm payrolls in four years. It wasn't hard to jump to conclusions. But as we learned today, there was no loss in August, which actually posted a revised 89,000 gain. What's more, the initial estimate for September showed a 110,000 rise in nonfarm payrolls--the highest since May.
Par for the course, we might add. Economic data is always and everywhere subject to revisions. So it goes. As such, the fear that the economy's about to slip into recession is, for the moment, on hold. At least until next week, when a fresh batch of numbers is released and we can all adjust our outlook one more time.
If nothing else, the world (including your humbled editor) has learned once again that trying to see the future by looking into the past shares all the safety qualities of driving drunk in rush hour with one hand tied behind your back. Forecasting is invariably laden with risk--and more than we know. True for economic forecasting, true for the capital and commodity markets. There are simply too many variables with too many relationships suffering too many exogenous events to believe that true clarity will be forthcoming any time soon if ever.
By that reasoning, we should all close up shop, find something productive to do (like planting trees or helping the sick), buy the global portfolio as determined by Mr. Market's cap weights for our retirement portfolios and move on. This, of course, is the ultimate default portfolio, perfect for investors with no particular view on the future but nonetheless eager to maximize return and minimize risk. Any takers? No? We didn't think so.
So, then, it's back to business. Yes, the economic gods hoodwinked us again. Now what? Okay, we admit it: we're a glutton for punishment, so let's dust ourselves off, pick up our shattered egos and take another look at the data as it now stands, all the while remaining fully aware that we just can't seem to learn from our mistakes.
Enough. Proceed from here at your own risk. As our chart below shows, the labor market's showing signs of life--one might say surprisingly so. Nonetheless, 100,000-plus new jobs per month hardly looks like a boom. It's pretty good by recent standards, but the trend still looks down. All of which brings us back to the old question: Is the economy just slowing or headed for something worse?
For obvious reasons, we're even more reluctant to venture a guess, at least in public. That leaves us to ponder the longer-term perspective for possible clues. That includes looking at nonfarm payroll changes on 12-month rolling percentage basis, which we've conveniently graphed below. It's clear that the economy's capacity for minting new jobs is looking tired. Yes, that could change, and for reasons that nobody currently understands. But for the moment, the trend is the trend and mere mortals must decide if it has legs.
As for the financial gods, otherwise known as the leaders of the Federal Reserve, there's the more immediate question of interest rates. More to the point, how does the 50-basis-point cut of a few weeks back look in context with today's employment update? Dare we say that if the Fed knew then what we all know now, the FOMC might have acted different on September 18? But shame on us for even posing such a thought, which only encourages more speculation.
Of course, aren't we all speculators in the end? Perhaps, unless we take the advice dispensed above and simply buy the global portfolio as determined by Mr. Market. Decisions, decisions...
Posted by jp at October 5, 2007 9:28 AM
minus 4000 to plus 89.000 is only 93.000 difference in a country with 300 million persons. When you consider the constant shifting between those out of work, those looking for work, those no longer looking for work, those just between short-term jobs, etc. it is not surprising to get endless revisions.
The data has become so timely that we have come to expect it to be perfect as well.
The alternative is to wait a few quarters to find out 'absolutely' what non-farm payrolls were in Q1'07 when we are already looking at Q4'07 and even contemplating a recession in 2008. It is a trade-off.
I think the lesson to learn is not to attach too much important to one number, especially if it looks suspiciously too high or too low.
Posted by: MrBill at October 9, 2007 2:55 AM
Have you seen an analysis anywhere of how the Feds managed to miscalculate the Aug jobs number by such a huge amount? If so I'd like to read it so I can better understand why they got the original estimate soooooooooo wrong. I have read several blogs on the revision that simply regurgitate the revision -- almost as if there is no surprise over the magnitude of the error. My question is: Where is the outrage over this humongous error? Why would Feds even issue a number until it's at least close to reality?
Thanks for your good site and analysis,
Posted by: Jeff Partlow at October 7, 2007 6:29 AM