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The Cognitive Bias of Ed Yardeni

One of the more astonishing things I've come across recently was an utterly disingenuous article in Sunday's Times: Navigating the Fog in Jobs Data.

The article is a discussion with (former Prudential) Strategist Dr. Ed Yardeni. It seems that he has been consistently over-estimating the BLS new job creation each month. As a group, Economists have been consistently over-estimating job creation this entire post-recession cycle; taking the "Under" on NFP has been the winning bet over the past few years. But the conclusion Yardeni reaches -- which is not only repeated by the paper, but practically endorsed -- is that since this cannot possibly be the case, something must therefore be wrong with the BLS Data.

I practically choked when I read the short column. The author opens with:

"When the numbers stop making sense, maybe it is time to stop believing them.

The Bureau of Labor Statistics reported far fewer net new jobs in May and June than Wall Street expected. If it happens again when July data are issued on Friday, Edward E. Yardeni, chief investment strategist at Oak Associates, will assume that there is something wrong with the report, not the economy. (emphasis added)

That's denial, plain and simple. Let's continue:

A Bloomberg News poll of economists estimates that 145,000 jobs were added in July. Mr. Yardeni, who said that he had overestimated the figures announced in the two previous reports, is aiming high again.

“I’m going to take a chance on making a third mistake and go with 180,000 to 200,000,” he said.

Most evidence aside from the government report suggests that jobs are plentiful, Mr. Yardeni said in explaining his prediction. If fewer people are getting hired than economists expect, he is inclined to attribute it to too few prospective workers, not too little work. (emphasis added)

Its not my job to factcheck/proofread the NYT business section -- but isn't somebody's job? There's so many things wrong with that statement I do not know where to begin. And as a pundit, I'm as wrong as anyone, so I prefer to point out flawed methodologies and/or statistical errors; I really don't like to point fingers and say "Hey! This guy/gal is wrong."  People who live in glass houses, and all that.

But in this case, I am going to have to make an exception:  What the hell is Yardeni smoking?

Let's review:  Why might we think these numbers make so little sense to begin with? We know (at least those of us who have been paying attention) that the economy has been unusually Real Estate dependent this cycle. We have seen a vastly disproportionate amount of new job creation come from the Real Estate complex (including agentsm, mortgage brokers, etc.)  We also know that the Housing market has cooled dramatically -- those of us paying attention also saw the beginnings of this as long ago as August 2005.

Further, we know that by just about every historical measure, this has been the weakest job creating recovery cycle in the post WWII era. We have previously noted that the unemployment rate is down due to NiLFs: Not In Labor Force.  Barron's described it as "the incredibly shrinking labor force, a phenomenon that's largely responsible for the deceptively modest unemployment rate."  The labor participation rate touched is near 15-year lows.

Using other measures that include these slackers, unemployment is actually much higher than the reported 4.6%: The well respected Liscio report noted the actual number could be much higher  of a jobless rate. If one includes the so-called marginally attached workers and part-timers who really want to be working full time, the unemployment rate weighs in at a formidable 9.4%.

Jobs that we are creating by and large have been paying less and offering weaker benefits than the jobs they have replaced. (This is a factor in the negative savings rate, but let's save that discussion for another time). One  notable exception to the weaker pay has been the home construction industry. These jobs have been relatively high paying. The sector has been a major source of new job creation, from real estate agents to mortgage brokers to Loews and Home Depot.

It should come as no surprise that as the entire sector has cooled, so too has the jobs creation associated with it. We now have the biggest inventory of new and existing homes for sale we have seen in nearly a decade. Realtors have said that home sales are now a 'buyer's market'. New home builders are witnessing the rise of a Ghost Housing Market, where specualtors walk away from their down payments, rather than close on a property which has declined significantly in price.   

Let's look at what Mr. Market is saying about the sector: In the face of slowing sales and building inventory, the homebuilders have gotten shellacked. The chart shows they gave up nearly 50% of their value over the past year:

>
ISE Homebuilder Index, May 2005 - July 2006

Source: StockCharts
>

The strongest engine of Job creation (Housing) was created by ultra low interest rates; As mortgage rates have risen back towards their historical average, that engine has gone into an expected cyclical decline. The market correctly anticipated this, as the chart above reveals.

Although the numbers disagree with Yardeni's forecasts, the conclusion may not be that the numbers make no sense; perhaps it simply means that Yardeni's forecast -- like those of so many other economists -- is failing to comport with economic reality:

“If I’m wrong, I’m going to start to wonder if we’ve run out of able-bodied people to hire rather than worry about whether the economy is slowing,” he said. “In this economy, we need more skilled workers and knowledge workers, and they’re getting harder to find.” This is true “even in China and India,” he added. “It’s not just a U.S. phenomenon.”

This confuses two different issues: The lack of highly qualified technical workers with the low new job creation.  I assume no one is suggesting that we are short 9.3 million qualified technical workers -- thats the shortfall Liscio report noted.

Lets continue:

Mr. Yardeni supported his case with several pieces of evidence, including the unemployment rate, which has remained at 4.6 percent despite the tepid announced job creation, and responses to confidence surveys indicating that consumers consider jobs to be plentiful.

A weaker-than-expected number of new jobs on Friday may stir concern about economic sluggishness and provide a lift for defensive sectors of the stock market such as health care, utilities, financial services and consumer staples, Mr. Yardeni said. Shares in industries where earnings are tied more closely to economic swings may rise if the job creation figure is surprisingly high.

Either way, he encouraged investors not to read too much into the jobs report, which has often required subsequent revision. Whatever it says on Friday may not be the last word.

“If the number is weaker than expected, pay no attention to it,” he said. “It’s probably wrong and likely to be revised up. Revisions tend to rise in an economic expansion.”

This is more than cognitive bias -- this is denial, plain and simple.

I have been a critic of various data assembly methods, hedonics, birth death adjustments, and many other numerical sleights of hand. I have rationally explained the differences between the Household and Establishment surveys. All it takes is a little elbow grease and cognitive functions.

I suggest others do the same.

>

NOTE: For a markedly different approach, compare the above story with a column in the Times a few months ago by Dan Gross: When Sweet Statistics Clash With a Sour Mood. Instead of rationalizing, there is a genuine attempt to make sense of the statistics in context of what we know -- rather than merely hope --  to be true.

>

Source:
Navigating the Fog in Jobs Data
Market Week
CONRAD DE AENLLE
NYTimes, July 30, 2006
http://www.nytimes.com/2006/07/30/business/yourmoney/30mark.html

Monday, July 31, 2006 | 06:45 AM | Permalink | Comments (66) | TrackBack (3)
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Comments

All one needs to know about Yardeni is his 180-degree wrong call from '96 through '99 re: "Y2K." It's remarkable how short the Public's memory really is. Yardeni spent four years pointing to the sky that would certainly fall throughout the systems world, and not a single elevator shut down anywhere. This is "expertise"? Waste no more space on him would be my advice.

Posted by: Harvey Bergholz | Jul 31, 2006 9:30:24 AM

Sounds like Ed got his training in the Bush administration. Ed Yardeni is a perma-bull and that is pretty much what he'd tell you. You had a link to an article on here a long time ago about a debate he had in San Fran as I recall. Yardeni said he is bullish at heart because of his positive childhood upbringing. Actually I'd put it more like he's paddling a boat up Denial, that river in Egypt.

Yardeni was pretty adamant post 2000 that the stock market would be fine allllllllllllllllllllllllllllllllllllllllllllllllllllll the way down. Anyone who was bullish in late 2000 is on my permanent shit list. If they couldn't spot the biggest mania in our life time, they aren't going to be able to keep me out of any relatively "normal" rough patches. Although, this rough patch is not normal either. He's a great numbers guy and has alot of pretty charts. That's his calling in life. He makes us pretty charts. Then it is our responsibility to interpret them.

Posted by: BDG123 | Jul 31, 2006 9:59:27 AM

"...a genuine attempt to make sense of the statistics in context of what we know -- rather than merely hope -- to be true. "

"There are three kinds of lies: lies, damned lies, and statistics." - Mark Twain

What do we Know to be true and how do we know it?

Posted by: babycondor | Jul 31, 2006 10:00:36 AM

IMHO, I think he has a point. We have lots of open job reqs here and can't fill them.

I don't know why people choose not to participate in the labor market. You may try to make the argument that these jobs don't pay "enough", but they are not paying less than they used to, and we used to be able to fill them.

Posted by: JoshK | Jul 31, 2006 10:00:46 AM

Read this from today's NYTimes:

Men Not Working, and Not Wanting Just Any Job

Posted by: Barry Ritholtz | Jul 31, 2006 10:03:31 AM

Yardeni made a courageous call on Y2K, and there was a lot of evidence with him. He was betting uncertainty would not be our friend. Wrong, but certainly as reasonable a bet as any at the time.

Ever since then, he's been nothing but permabull, having learned to serve his masters or be unemployed (that's the back room buzz anyway).

So he'll be playing Mozart on an underwater Titanic when the Kudlows of this world are at least swimming for the surface.

Posted by: RN | Jul 31, 2006 10:04:26 AM

yardeni's call surprised me too, who i thought was more "rational" as well as bear and is often quoted by Mark Faber..What gives?

Posted by: andiron | Jul 31, 2006 10:06:27 AM

"The strongest engine of Job creation was created by ultra low interest rates; As mortgage rates have risen back towards their historical average, that engine has gone into an expected cyclical decline."

C'mon, BR! It's all been due to W's tax cuts!!! We still have those while Fed rates have risen, so everything should be fine!

Seriously though, I believe you could become the first Pulitzer winner for a blog posting if you separate the impacts of tax cuts versus fed rate cuts and prove the Fed's impact dwarfs that of income tax cuts. To date these income tax cuts have piggybacked the heavy lifting done by the Fed's rate cuts. Though the Republican party may never forgive you for exposing the truth.

Posted by: Chief Tomahawk | Jul 31, 2006 10:24:01 AM

Yardeni's angle is Just more lala land root for the administration BS ala Donald Rumsfeld's "oh I don't know if there's a civil war in Iraq" and Mary Matlin's "everyone who doesn't see it our way is just living in a parallel universe". "You can fool too many of the people too much of the time"-James Thurber

Posted by: Bob A | Jul 31, 2006 11:07:30 AM

U.K. Mortgage Approvals Accelerated in June, BOE Says (Update3)
July 31 (Bloomberg) -- U.K. mortgage approvals rose in June at the fastest pace in five months, a sign the revival in Britain's $6.2 trillion property market may last through the rest of the year.

Lenders approved 120,000 home loans, up from 117,000 in May, the Bank of England said in London today. The figure, which is adjusted for seasonal swings, exceeded the median estimate of 115,000 in a Bloomberg News survey of 20 economists.

The central bank rekindled the housing market a year ago this week by cutting its key interest rate to 4.5 percent. Higher mortgage lending, an indicator of demand six months later, suggests that residential property values may continue to support consumer spending and economic growth this year. Housing represents 59 percent of U.K. wealth. . . . . . . . . . .

Posted by: Mano | Jul 31, 2006 11:24:07 AM

"We have lots of open job reqs here and can't fill them.

I don't know why people choose not to participate in the labor market. You may try to make the argument that these jobs don't pay "enough", but they are not paying less than they used to, and we used to be able to fill them."

I suggest you read the Boston Fed study Mark Thoma posted.

http://www.bos.frb.org/economic/conf/conf51/papers/freeman.pdf

I will post this from Richard B. Freeman's study:

"In this paper I assess the two competing visions and the demographic and economic projections on which they are based. I reject the notion that the retirement of baby boomers and slow growth of the US work force will create a future labor shortage in favor of the argument that the increased supplies of skilled labor in low-wage countries will squeeze highly skilled as well as less skilled US workers."

So what shortage are you talking about joshk?

And what jobs pay the same? When I was outsourced from AT&T to IBM that was a $9000 pay CUT. When IBM offshored my job to India that was a total loss of income. The very few jobs I have been offered in the last 4 years pay about $15 an hour with no benefits. I made more than that as a graduate school intern.

If there is such a shortage, just hire back the half a million of us that have been fired from IBM, HP, Intel, Sun, Oracle in the last 5 years.

Posted by: me | Jul 31, 2006 11:24:37 AM

JoshK: What kind of jobs are those you cannot fill? As you seem to be agreeing with the author, I presume you have a lack of applicants.

Have you considered that your methods of advertising the jobs are inadequate, or in case you get resumes/leads from job boards, that you may have set your filtering bar too high?

The latter has been happening at my employer, staffing reps are instructed to do tight searches, for a combination of attitude ("we are looking for exceptional people" -- being that we do the most advanced rocket science here) and hiring managers being too busy or otherwise uninclined to do a lot of thankless phone screens.

As a result, "we cannot find local talent" and have to hire in "low cost geographies" instead. Right. In fact, that may just be the subtext of "we look for exceptional people (here)".

I recently participated in interviewing two quite competent but not stellar candidates for my group, one of whom got rejected by others in part because there were doubts about his degree of "passion" and "career commitment".

In the round table it again came up that we need people who can hit the ground running. I pointed out that when it is so tough to find people, we should consider making compromises, look for "generic" talent, and be prepared to build industry specific know-how inhouse.

Finally, perhaps people have choices, or at least hope so, and just don't want to work in my company/industry. Not sure about yours.

Posted by: cm | Jul 31, 2006 11:42:12 AM

me: One thing I don't know, and quite likely never will, is whether HR actively age discriminates when filtering resumes. A possible indicator is that I heard rhetoric of looking for people with around N years of "experience".

In part this is because (R&D) managers don't want to hire "overly experienced" people for rather mundane jobs for fear they will be bored and resign or lose motivation (perhaps also won't take micro-management). Also "experienced" people tend to have a more realistic assessment of career prospects and are generally less motivated by promises of promotion, career path, etc. We are a product group, and while we do some "technology", much of the work is rather routine, this being a "mature" industry. Management appears to seek people who are "excited" in face of this, which invariably means younger workers with a drive to prove themselves. They don't seem to get the concept of doing solid and professional work just for a paycheck, which "experienced" people are often perfectly willing to do, as the other side of the "realistic assessment" medal.

But I'm repeating myself, having said this often enough before.

Posted by: cm | Jul 31, 2006 12:00:34 PM

cm,
You bring up a good point. I find one of the biggest mistakes I've seen is looking for people who fit the "requirements". Many times the best candidates are rejected out of hand because their resume doesn't fit the HR posting and HR in its wonderfully bureacratic way gets involved in something they really know nothing about. Or, the pressures of the business require immediate contribution and the training requirements are overestimated.

In the long run, if one is hiring and building for strategic advantage it is far and away better to find the best generic talent. The Southwest Airlines model. Obviously, if you are looking to hire someone to be a research chemist, basic talents apply. But, most jobs are not as research chemists and many jobs can be done quite ably by a tremendously talented individual with a generic background.

Posted by: BDG123 | Jul 31, 2006 12:08:16 PM

Does anybody here have a take on Rifkin's "The End of Work"? Not his solutions but the statistics. If he's right the effect of a shrinking job market on the housing correction could be pretty big.

Posted by: KirkH | Jul 31, 2006 12:11:44 PM

"You bring up a good point. I find one of the biggest mistakes I've seen is looking for people who fit the "requirements"."

One of my favorites was an ad wanting 8 years of java experience; and at the time, java had only been around 5 years.

Yep they could find any qualified people.

cm

You are right about the motivation. After companies eliminate your pension and charge you more for less health care every year, empty promises fail to motivate.

Posted by: me | Jul 31, 2006 12:38:01 PM

Like so many other permabull straterigists who rose to prominence in the 1990s, Yardeni is just riding on the fumes of his prior (lucky) successes.

He makes the same call, quarter after quarter, year after year: the U.S. is the world's growth and innovation engine and the stock market will continue to work ever higher and higher.

He was right from 1987-2000. Not so much for the past six years.

I agree with the previous poster that anyone, like Yardeni, who didn't see the train wreck coming following 1999-2000, isn't worth a tinker's damn.

Even when he's ever-so-slightly-defensive about stocks, like in early 2002 when he said the SPX was still a tad overvalued, his calls still look absurd in retrospect.

In early 2002, when the Dow was trading at 10,500, he said that the Dow had "risk down to 10,000" by year end, though he said he could also see it rise to 11,500.

The Dow dropped to 7,200.

Stocks rise and fall based on liquidity and investor preference. The fact that Yardeni could only imagine a worst-case scenario of a 5% decline, after the biggest stock bubble since the 1920s, shows you just how delusional he it.

Posted by: angryinch | Jul 31, 2006 1:05:09 PM

We DO NOT have a problem with hiring skilled workers in America. Instead, we HAVE problem with companies being unwilling to train their employees to become skilled workers.

Stop whining about a lack of skilled candidates to fill open positions, and start re-allocating budget $$ from your stock buybacks to training your people instead. Sheesh.

Posted by: Matt | Jul 31, 2006 1:12:05 PM

What is with these people who are so intellectually bankrupt? Unfortunately it's not uncommon. Reminds me of all the harping about owners' equiv rent aspect of CPI. They touted it when it helped their case, and dismiss it as problem riddled, unreliable when it undermines their argument. Same thing with unemployment and the household survey vs. employer survey. This is exactly why I hold them in such contempt and have a generally cynical view of the press, analysts, etc. They truely are clowns and shills, except clowns are sometimes entertaining (or terrifying, depending on your psychological makeup)...these people...not entertaining, just irrelevant.

Got back into my coal position this a.m. on a textbook oversold + pos divergence + downtrend line breakout, and the whole sector took off like a scalded dog. So I started channeling some Howard Dean and stood on my desk and let out a 98dB "YEARRRRGHHHH!!!"

Just kidding (about the yelling).

Posted by: Alaskan Pete | Jul 31, 2006 1:15:07 PM

Just had to add...

It looks like the turing test (sp?) is now giving investment tips. The one for my last post said "get yen"

Wish I'd been paying attention when it said "sell GM"

Posted by: Alaskan Pete | Jul 31, 2006 1:17:40 PM

"He was right from 1987-2000. Not so much for the past six years.

I agree with the previous poster that anyone, like Yardeni, who didn't see the train wreck coming following 1999-2000, isn't worth a tinker's damn."

Interesting comment...and certainly true. I might point out that (one of) the most bearish managers/writers in '99-'00 was Don Hays (Hays Advisors). He caught a lot of flack then, and was obviously correct. He is currently UBBER bullish, and looking for a market double in the next 2-3 years.
I suggest that you find some of recent writings. He, btw, agrees with Yardeni, as do I. Flame away.

Posted by: ss | Jul 31, 2006 1:25:18 PM

bdg123, you bring up a really interesting point about "requirements". Many years ago when I was a kid, I was hired by a major bank via a temp agency to go through resumes received by a major international bank for a significant, important job.

In short, me, a kid, with a liberal arts degree and no banking background whatsoever, was hired from a temp agency to do the first cut on a fairly substantial pile of resumes.

But why not hire a kid?

Any kid who could read could have performed flawlessly by following the instructions, which were: Make two piles. In the first pile put all the people who met every one of the listed requirements; in the second, put those who don't. It was clear that the second group would receive a PBO (polite brush-off) letter.

I couldn't help myself: I created a third pile. I explained to my boss-for-the-day that it held the resumes of people who, while lacking one or another of the sought requirements, were such strong candidates overall -- in some cases much stronger than those boasting all the requirements -- that it might be worthwhile considering their resumes.

I've always wondered what happened to that third pile. I suspect it was added to the PBO pile. After all, my boss-for-the-day was an HR bureaucrat.

About two years after that temp experience, when I had a real job, I brought in an ex-con (drug dealing), college drop-out for consideration. For a lot of reasons (not worth detailing here), I thought he was worth hiring.

Good hiring demands imagination, a measure of creativity -- and the willingness to take risk. It's NOT a job for bureaucrats. The company owner, who had imagination, creativity and was willing to take risks, hired him.

Jim was one of the best we hires ever made. What's more, my boss's willingness to give him the job transformed a young ex-con's life. A few years later the young man sought -- and won -- an even better job. By then, his background was irrelevant to a company seeking a reliable, utterly competent, highly intelligent professional for a position with a posted requirement of a college degree. And no criminal background preferred!

Posted by: ~ Nona | Jul 31, 2006 1:27:30 PM

Don’t forget help wanted advertising, which has been very weak throughout this recovery and recently took a nosedive. (I’ve tried to account for online advertising as well, using the Monster Employment Index in conjunction with the Conference Board Help Wanted Index. Online had about 20% market share in 2003, when the Monster index begins. That index has gone up since then, but the Conference Board’s index has gone down. When I take a weighted sum, it’s pretty much flat for the recovery so far.)

Posted by: knzn | Jul 31, 2006 1:36:29 PM

" He is currently UBBER bullish, and looking for a market double in the next 2-3 years.
I suggest that you find some of recent writings. He, btw, agrees with Yardeni, as do I."

That is what makes markets but are you related to Glassman? DOW 36,000 redux.

Posted by: me | Jul 31, 2006 1:39:01 PM

Here is an article I ran across in this morning's New York Times, which addresses this issue from a slightly different perspective, and portrays what I call the "new male stereotype":

http://www.nytimes.com/2006/07/31/business/31men.html?hp&ex=1154404800&en=f82d5d3f9f822e4f&ei=5094&partner=homepage

Now that women are going to college and graduating in greater numbers, starting to make money, and move up in the world, I think we are going to see more and more of these kinds of articles, about how men are lazy, don't want to work at "just any job," don't work as hard as women for what they get, etc., etc. It's the 21st century equivalent of the woman in the '50's and '60's, who supposedly just went to college "to get her Mrs. Degree."

Posted by: GRL | Jul 31, 2006 1:50:34 PM

December 2008

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