Friday, September 2, 2011

August jobs data do not point to a recession

The U.S. economy is not entering a recession just because there were no new jobs created in August. The number reported today that is making headlines is the result of applying seasonal adjustment factors that are often wrong to data that are almost sure to be revised significantly a year or so from now. (Before seasonal adjustment, I note that 118K nonfarm payroll jobs actually were created in August, according to the establishment survey.) You can't jump to huge conclusions based on one or even two months' worth of jobs data—they are just too volatile and always subject to later revision.

Yes, jobs growth appears to have slowed down a bit in recent months. The six-month annualized growth rate of private jobs, according to the establishment survey, has slipped from 2.1% in April to 1.5% in August. But as the chart above shows, the bigger picture is that the economy has managed to create between 2.1 and 2.4 million private sector jobs since the end of 2009, depending on which survey you look at, and to my eye, the trend in both is still upwards. It's not a robust upward trend, since the economy is still struggling and fighting headwinds, but taking into account a range of key indicators (e.g., flat weekly claims, strong factor orders, strong commodity prices, rising C&I Loans, strong corporate profits, a steep yield curve, low swap spreads, rising capital goods orders, consumers' improved financial health, rising industrial production, rising retail sales—all documented in my posts of the past month), I believe that on balance the economy is still making forward progress and is not in danger of sinking into another recession.

I am not saying that the economy is in great shape; I'm just trying to make the point that things are not nearly as bad as the headlines would have you believe. From an investor's point of view, it is not enough to know that the economy is weak—you have to know whether the economy is weaker than the market believes it is. I think there is room for optimism because the market has an exceedingly bearish outlook for the economy (best found in the extremely low level of Treasury yields) that in the fullness of time is likely to be proven wrong.


Mark Holder said...

Unfortunately the market and the media would rather focus on sentiment indicators rather than facts.

Benjamin Cole said...

How do we differ from Japan? We have had a real estate bust, little to no inflation, have hit zero bound, and growth is anemic, yet we have a Federal Reserve Board where they are obsessed about inflation.

This policy of tight money and large federal deficits has produced 20 years of misery in Japan, especially for investors, who have seen property and equities values fall by 80 percent.

Preserving the value of Ben Franklin in monetary formaldehyde is poison for the economy, especially after a real estate bust (loans are repaid in nominal dollars).

A peevish monetary asceticism, a worship of the nominal value of the dollar to the level of fetish, is now mistaken as "conservative," even though Milton Friedman himself openly encouraged the Bank of Japan to pursue inflationary and growth policies.

I say clamp down on the federal deficit, remove business regs, and run an expansionary monetary policy for several years.

Can we have some boom times before we worry about inflation?

Pragmatic Investor said...

You are already proven wrong. Yesterday you were looking for upside surprise and now you are using seasonal adjustment as a excuse. There is a reason for seasonal adjustment and it's all incorporated in the analyst expectations! I am sure you wouldn't have done it if the number had been higher than expected. I wish sometimes you could have a little integrity and admit it when you are wrong. Can't wait for your year end review to see how you are going to justify your prediction of 4%+ GDP growth for this year.

brodero said...

We are going to need to see private payroll pick up or the 6 month annualized rate is going to drop to dangerous recession warning
level of .6%

TradingStrategyLetter - Weekly Summary said...

A Fed that is obsessed with inflation? Hardly. They have just promised 2 more years of zero interest rates!

The problem I have with the 'expansionary' thesis is that IMO it has been a combination of both fiscal and monetary stimulation over the past 30 years which has brought us to the brink! How can more of it be any good? That is the Greek model.

In the undisputable words of R. Paul - if debt is the problem - then how is more debt the solution?

Frozen in the North said...


Feds are worried about inflation, specifically worried by Deflation. There is no sign of inflation.

However, QE3 is going to be a total waste of time and money. The system has too much debt, it needs to purge,another 36 to 48 months should do the trick (BTW with great harm to the population at large).

Anyone that thinks the system can be kick started with looser regulation or lower wages forgets the principal problem: SMEs have excess capacity, they're not about to add to their systems until they are closer to full capacity utilization. The reason why there is no inflation.

By the way Scott (assuming you read comments), I wholly agree that America is not yet in a recession, very slow growth seems to be the problem, but then an economy that depends so much on consumption is bound to be in trouble when 9% of its workforce in unemployed.

McKibbinUSA said...

The US employment to population ratio continued its decline in August -- more at:

The US employment to population ratio has been trending sharply downwards since 2000.

Scott Grannis said...

Frozen: the economy never depends on consumption for its strength. That is a major supply-side tenet. By far the most important thing is the "supply" side of the economy: work, investment, entrepreneurship, production. That's what drives everything. Supply creates its own demand. Globally, we can never consume more than we produce.

Jake said...

"Supply creates its own demand. Globally, we can never consume more than we produce."

But can't we produce more than we demand, hence businesses will produce less?

Benjamin Cole said...


It is a mistake to confuse low interest rates with easy money, and Milton Friedman said so.

The proof of this is the strong yen for the past two decades, and deflation in Japan, even though they have hit zero bound.

Once you hit zero bound (and we have) then low interest rates are no longer stimulative.

Then, you have to go to sustained and aggressive QE (and Friedman advocated that for Japan) to get the eonomy going.

I cannot fathom the self-destructive fetish for minor deflation, and anti-QE-ism that now runs through the right-wing blogosphere.

I can only assume it is anti-Obamaism, and when a GOP'er gets into the White House, there will be calls for Fed stimulus--as happened when Ronald Reagan was in there.

BTW I liked RR and voted for him. I liked George Gilder too--growth should be our obsession, not fighting inflation, A modern economy that favors inflation-fighting before growth will succeed in obtaining that goal.

See Japan.

Anonymous said...

The household survey was not nearly as bad as the establishment survey. Household survey showed a gain of 331K employed.

狂猪 said...

Jake, this is very well put.

"But can't we produce more than we demand, hence businesses will produce less?" -- Jake


I don't agree with this statement and in particular the word "never".

"economy never depends on consumption for its strength" -- Scott

I know you probably used stronger language than warranted to make a point. The fact is the world is way too complex for a simple absolute doctrine to always work. More to the point, I think the world operates on many feedback loops. For example, a feedback loop triggered by Jake's point is the situation we are facing now:

lower production -> lower employment -> lower consumption -> repeat

Lastly, since we are talking about jobs, we should also give a call out to the tea party for the big fat zero job growth of August. Many companies large and small held off hiring and new investment while the tea party terrorized our nation.

The beating will continue until morale improves!

septizoniom said...

how do you know what you claim to know, especially when it is contra the crowd?

William said...

septizoniom said...
how do you know what you claim to know, especially when it is contra the crowd?"

For one thing, the "crowd" is usually wrong about economics among other things. When more than 90% of the population - more or less - believes something will happen, it almost never does.

septizoniom said...

william: how do you know that?