Friday, April 5, 2013

Jobs report more noise than signal

As Ed Lazear points out in a very timely op-ed in today's WSJ, "Beware the Monthly Jobs-Report Chatter," the numbers are estimates that:

... are subject to significant revision, they are volatile, and they tell us very little about the direction of the labor market. There are subsequent revisions, one and two months after the first announcement, until the number becomes final, sometimes up to two years later. The error in any given month tends to be very large, which means that its reliability is low.

I have lived through perhaps 300 jobs reports, and I have seen the numbers revised time and again, often by very large amounts. As Ed correctly notes, "... the average error in the initial report is almost as large as average job creation itself."

So today's jobs number "miss" (95K private jobs vs. 200K expected) could well turn out, after revisions are made over the next few months and years, to be not a miss at all. At the very least, we know that one weaker-than-expected jobs report does not a recession make. Are there other signs of a significant slowdown in the economy? None that I can see. In fact, there are many areas of the economy that are growing at decent rates, with no sign of any significant or sudden disruption. Besides, the March shortfall needs to be put in the context of the previous 5 months' worth of private sector job gains which averaged 223K per month. Today's number is most likely just noise. The signal—that jobs continue to grow at a moderate rate—is unchanged.

This first chart shows the monthly change in private sector jobs. Note that the "noise" in this series—the average magnitude of month-to-month variations—can be almost 200K per month. The March number falls well within the range of normal fluctuations.

Taken in the context of the past six months, the annualized growth in jobs is about 2%, the same as it has been on average for the past two years.

The tepid growth in the labor force continues to be the most disappointing aspect of the jobs market. The labor force grew only 0.21% in the past year, and it has grown only 0.24% since the end of 2008. We've never seen anything like this. Upwards of 10 million people have "dropped out" of the jobs market; they've either retired or given up looking for a job. Until we can somehow entice many of these folks to come back to work—by offering more and better job opportunities—the economy is going to be growing at a disappointingly slow pace. The decline in the unemployment rate to 7.6% is a by-product of the very slow grow in the labor force, not a sign of a healthier economy.

This last chart reminds us of the trends that are still likely in place. This recovery has seen a fairly large decline (about 735K) in the number of public sector jobs, but that decline appears to be leveling out. The private sector continues to create jobs at a pace of about 2% per year, or about 190K per month. That combination is enough to give us real growth of 2-3% per year. Not every exciting, but certainly better than a recession.


McKibbinUSA said...

Life in the US, and indeed the world, is going to become increasingly hard for those without world-class skills...

RichmondG30 said...

I can't help but think (as William alludes to) that much of what we are seeing is being driven by increased globalization. Cheaper and faster shipping and communication are bringing a level of competition that was unthinkable as little as 10 years ago. Unskilled or low-skilled workers making $30 an hour in the US is not sustainable over the long term when the same job can be done for $2. The system must reach equilibrium, and maybe that is what we are seeing play out.

Gloeschi said...

It's all good. Buy Apple.

L.A. said...

Headline numbers aren't great, but prior months were revised upward by 80k. It's hard to believe the large drop in construction employment gains when most leading and coincident indicators in that arena are strong. Agreed that it is foolish to take one month's employment report as a definitive turning point in the business cycle. Anyone with a knowledge of statistics or BLS methodology should agree.

Anonymous said...

Interesting points from Business Insider.

Actually, This Was A GREAT Jobs Report

Rob said...

Rob said...

"Exchange-traded funds that bet on long-dated U.S. government debt prices to fall suffered their worst one-day loss since late May, while the 30-year Treasury bond booked its biggest one-day gain at the same time.

This reversal of fortune came a week after long-dated U.S. government bonds recorded their worst quarter in a year on the expectations the U.S. economy was gaining traction and the speculation that the Federal Reserve might slow or stop buying bonds to support the economic recovery before the end of year.

ETFs that bet on falling Treasuries prices on the other hand posted their biggest quarter gain in a year."

Benjamin Cole said...

"The tepid growth in the labor force continues to be the most disappointing aspect of the jobs market. The labor force grew only 0.21% in the past year, and it has grown only 0.24% since the end of 2008. We've never seen anything like this. Upwards of 10 million people have "dropped out" of the jobs market; they've either retired or given up looking for a job. Until we can somehow entice many of these folks to come back to work—by offering more and better job opportunities—the economy is going to be growing at a disappointingly slow pace."--Scott Grannis.

Agreed--and I don't believe 10 million Americans suddenly, in 2008, decided they didn't want to work anymore, and now we face a "structural" impediment to employment growth.

On imports, globalization and jobs:

Remember, the tidal waves of imports raise your living standards, but if wages rise in China and jobs come back to America, that is good news for you also.

Got that?

William said...

Ed Yardini had an interesting take on jobs, inflation and the FED:

"In the Brave New World (BNW), robots like Baxter will replace assembly line workers. In this world, the risk of ultra-easy monetary policies isn’t consumer price inflation. Even now as we approach the dawn of the BNW, such inflation remains remarkably low despite the best efforts of the central banks to boost it. The CPI inflation rate among the G7 economies was only 1.6% y/y during February, and even lower at 1.4% excluding food and energy. In the US, PPI inflation rates are close to zero. In the euro zone, the CPI inflation rate is just 1.7%....

In the BNW, pumping more liquidity into financial markets won’t stop consumer price deflation, but it will inflate asset prices, a.k.a. asset bubbles. Central bankers at the Fed and at the BOJ are still using models based on the 1930s. They are clueless about the BNW. That’s why they can’t imagine that productivity-led deflation should be welcomed as the best way to boost the purchasing power of all consumers, whether employed or on government support.

Hans said...

When the job report are good, is that noise too..

If the job report is good, do we need to wait for several revisions?

Hear is the real reason and why we are now in a new no-growth era...

GL, with that 3% growth rate promoted by the worthless Department of Commerce..

Gloeschi said...

Scott is right in saying that Friday's report was noise in a statistical sense. However, I don' think he understood what that means. According to the BLS, the change in total non-farm payrolls was not large enough to make it statistically different from zero:

Fasten seat belts. Zero gravity flight has begun.

William said...

From the Wall Street Journal:
Workers Stuck in Disability Stunt Recovery

"The unexpectedly large number of American workers who piled into the Social Security Administration's disability program during the recession and its aftermath threatens to cost the economy tens of billions a year in lost wages and diminished tax revenues."

You may have to Google the title to read the article.

Rob said...

"The interesting relationship between these seemingly parallel asset classes is that their current correlated nature is counter-intuitive. If long-term U.S. Treasury bonds decline in price, we usually could surmise investors want to assume more risk, and when long-term U.S. Treasury prices increase, we can usually assume that investors are looking for safer investments. However, in this case, longer-term U.S. Treasury prices are increasing while market-based equity prices are also increasing, creating a dichotomy for some onlookers.

Although some investors remain blind to the risks, my longer-term macroeconomic analysis tells me that the risks may never have been higher. They tell me that our current economy is riding the coattails of a fabricated growth scenario, and my analysis tells me that it cannot last. I believe this warning is supported by the dichotomy between longer-term U.S. Treasury bonds and equity prices, I believe Smart Money investors actually have been buying longer-term U.S. Treasury bonds at ridiculously low yields because they also recognize the risk, and it is only the fast-money, or latecomers, who are buying U.S. equities at these levels.

My preferred investment alternative remains proactive risk-controlled strategies that are capable of making money when the market increases and when it declines. "

Rob said...

Scot, do u agre that bond investors are more sophisitcated and cleverer than equity investors and therefore we should follow their lead ?!

Scott Grannis said...

For a long time I believed that bond investors were better at understanding economic fundamentals than equity investors. In recent years, however, I'm more inclined to the belief that bonds and equities belong to the same capital market, and that there is no a priori reason to believe that those who buy bonds have a better grasp of economic fundamentals than do those who buy equities.

The challenge therefore is to understand how the behavior of the two markets has a common denominator. I think both markets are priced to a consistent assumption: namely that economic growth is likely to be very slow for the foreseeable future.

Jeff said...

Scott, see quote below...Art Laffer?? Say it isn't so.

Schultz, former secretary of state under President Ronald Reagan, and Becker, Nobel laureate economist and economics professor at the University of Chicago, are among a small group of conservatives who have voiced support for a carbon tax.

Conservative supporters of a carbon tax also include former South Carolina Republican Rep. Bob Inglis, Mitt Romney’s former economic adviser Gregory Mankiw and economist Art Laffer.

Read more:

Scott Grannis said...

Re: carbon tax. The key here is that all of these people, including Laffer, believe that a carbon tax would be good, provided that it be revenue neutral. They accept the fact that CO2 is a greenhouse gas, and that it likely poses a risk of global warming, and imposing a tax on carbon emissions is a reasonable and efficient way to ensure that those who use carbon-based fuels pay for the externalities of what they do. A carbon tax would certainly be more efficient than the current patchwork of subsidies. But if a carbon tax were not revenue neutral (i.e., if the revenues raised from the carbon tax were not offset by tax reductions in other areas), then they would consider a carbon tax to be a mistake, since it would only add to overall tax burdens and it would accommodate a larger public sector, and that would in turn reduce economic growth.

ketz said...

At least this is a good start for our economy now. Maybe it can do better this year.

bank bailouts