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NFP: Another in a long series of disappointments

As we expected, yesterday's NFP was another stinkeroo. The 121k number was significantly below the 200k consensus, and far, far away from some of the myopically optimistic upside outliers.

Let's delve beneath the surface a bit, first via Barron's Alan Abelson:

"As Philippa Dunne and Doug Henwood, our favorite parsers of the monthly employment reports, put it: "This was a weak report, with few signs of strength under the surface." They note that the 121,000 slots added brought the average monthly gain in the second quarter to a meager 108,000, sharply below the first quarter's 176,000 and even more sharply below the long-term average of 236,000.

A full 25% of the gain was from government hiring, mostly local and state . . .

A good chunk of the 75,000 new jobs from private services were from health care and the bar and restaurant sector. That prompts our jolly duo to speculate that "maybe our new economic model is one in which vigorous eating and drinking inspire a lot of doctor visits, which reinvigorate us for a fresh round of eating and drinking." We'll drink to that.

Unemployment held steady in June, at 4.6%. But a glance at the data in the report reveals the percentage of people who want a job but can't get one edged up to 5.8% of the labor force from 5.3% in May. If you toss in the number of folks who work part time even though they'd rather be working full time, the percentage rises to 8.7%, from 7.9% the month before." (emphasis added)

So not only was the top line poor, but the data points touted as strong -- primarily, the low unemployment number -- was lousy also.

Jared Bernstein of EPI provides some insight into why employment growth has been slowing:

"An important hint from today's report, for example, shows that employment in residential construction fell 6,800 over the past two months, the sector's first back-to-back monthly losses since the spring of 2001. Thus far this year, residential construction employment is up 7,000, compared to an increase of 20,000 over the same six-month period last year. And while employment in real estate was up 5,000 last month, job growth among credit intermediaries and insurance carriers—so-called "downstream industries" from the housing sector—has been notably flat over the past few months. In other words, there are many connections between the housing sector and other sectors in the job market, and the cooling of that sector has far-reaching implications."

Regular readers of The Big Picture will no doubt recognize this line of thinking.

The bottom line is that this cycle -- artificially driven by government stimulus -- is coming to the end of its unnatural life.  Look for a return to the prior period of flat growth and even weaker job creation -- at least until the next round of Rate Cuts restarts the real estate machinary . . . 

>

Sources:
Get Shorty
ALAN ABELSON
UP AND DOWN WALL STREET 
Barron's MONDAY, JULY 10, 2006   
http://online.barrons.com/article/SB115231256503801178.html

Slow job growth in second quarter reflects pace of overall economy
Jared Bernstein with research assistance from Yulia Fungard
EPI, July 7, 2006
http://www.epi.org/content.cfm/webfeatures_econindicators_jobspict_20060707

NFP: much ado about very little
The Big Picture, Friday, July 07, 2006 | 06:45 AM
http://bigpicture.typepad.com/comments/2006/07/nfp_much_ado_ab.html

Saturday, July 08, 2006 | 08:02 AM | Permalink | Comments (41) | TrackBack (3)
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Comments

Does anyone know the background of these people that Barrons' Ableson references ? Are they the best and brightest on Wall Street or Academia ?

Posted by: prw | Jul 8, 2006 8:40:03 AM

They put out the Liscio report -- which is a very well respected analytical service.

So now that any potential ad hominem attack failed, what else can we bring up to avoid discussing the actual data?

Posted by: Barry Ritholtz | Jul 8, 2006 8:47:59 AM

very sensitive question ????

Posted by: prw | Jul 8, 2006 8:55:18 AM

no, I am on troll patrol --

been getting too many weasel posts, spam, and other creeps --

sorry if I caught you in the cross hairs

Posted by: Barry Ritholtz | Jul 8, 2006 9:41:59 AM

many are bashing the ADP Payrolls report for being way off, again. problem is ADP doesn't do the forecasting, their partner Macroeconomic Advisors does. ADP provides the data and Advisors filters and runs it through their own statistical engines. Advisors weighs the ADP portion at 70% and BLS at 30%. Still their projections were way off. Still a useful measurement to look at as part of overall analysis IMO. Predicting monthly jobs is tricky business and as we know the margin of error considering the size of the US workforce could be that 121k. The key of course is the trend.

Posted by: Richard | Jul 8, 2006 9:59:36 AM

Barry, sorry that you have to be on troll patrol...and THANK YOU for being on troll patrol.

~ Nona

Posted by: ~ Nona | Jul 8, 2006 10:31:23 AM

Barry, I don't mind honest debate but I can't stand trolls. So keep up the good work.

And by the way, I'm glad that even though you have your new "pay" blog, you are still posting over here. As a retired grandmother, our financial efforts are over and are on a conservative auto pilot. We no longer buy. But I love your blog and am trying to learn more about all things financial. So thanks for continuing your posting here.

Posted by: JWC | Jul 8, 2006 11:30:39 AM

Barry, I don't mind honest debate but I can't stand trolls. So keep up the good work.

And by the way, I'm glad that even though you have your new "pay" blog, you are still posting over here. As a retired grandmother, our financial efforts are over and are on a conservative auto pilot. We no longer buy. But I love your blog and am trying to learn more about all things financial. So thanks for continuing your posting here.

Posted by: JWC | Jul 8, 2006 11:30:44 AM

Construction continues apace in the new-home industry and inventories build. A major slackoff in hiring has not yet occurred. A goodly share of the NFP uptick was probably seasonal hiring, lifeguards, camp couselors, etc.

Posted by: jcf | Jul 8, 2006 12:20:58 PM

what are your thoughts on :
-----The level of job growth that is ``consistent with economic growth near potential and a steady unemployment rate'' is probably closer to 100,000 instead of 150,000, as ``it used to be,'' Chicago Fed President Michael Moskow said last month. (bloomberg)

Posted by: gsc | Jul 8, 2006 12:25:24 PM

Yet on the same day these crappy numbers are published the First Appointee gets on the soap box and tells the country how good we are doing, how his tax cuts have made the economy so robust, blah, blah, blah.

I don't know who he is talking to. Probably the rich folks who have benefited from his policies. Nobody else can get in to see him.

One of these days the media is going to find out that most intelligent people in the country are ignoring them and the rest of the people could care less. In a nation of 350 million people to suggest that you are relevant because a quarter million watch your program is a bit ingenious. Wonder what the other 349 million 750 thousand folks are doing? (Actually I know what I'm doing it's the rest of you I'm wondering about).

Point is the market tanked on a bad jobs number. Since the jobs number has been declining month over month and that is a "data point" shouldn't that have suggested that the Fed might stop now?

The fact is we are in a recession. It isn't "official" it is real and I have found that there is a difference between those two states.

This is going to be the shortest period ever between raising interest rates and lowering them the world has ever seen. I wouldn't be surprised to see 4.5 before the end of the year. (Well, I would, but we'll see).

Posted by: john | Jul 8, 2006 12:31:40 PM

john: slower growth does not always equal lower inflation in the short term. The Fed is saying they're out to fight inflation, not necessarily spur growth. In the same set of reports yesterday, wages were creeping up even with fewer new jobs being created. Don't be suprised when the rates don't come down this year.

Posted by: Andy | Jul 8, 2006 1:22:20 PM

"One of these days the media is going to find out that most intelligent people in the country are ignoring them and the rest of the people could care less. In a nation of 350 million people to suggest that you are relevant because a quarter million watch your program is a bit ingenious. Wonder what the other 349 million 750 thousand folks are doing? (Actually I know what I'm doing it's the rest of you I'm wondering about)."

We are a nation of not quite 300 million . . .

Posted by: j. cameron | Jul 8, 2006 1:38:54 PM

i would suggest that the pre-announcement by MMM and AMD was what sold the market.... futures were fine before those reports , then turned down right into the cash market

Posted by: fx | Jul 8, 2006 1:56:08 PM

"We are a nation of not quite 300 million . . ."

vs

"a nation of 350 million people"

Both of you are correct. The only difference is one counts all legal residents and the second one takes into consideration both legal and illegal.

Posted by: V L | Jul 8, 2006 2:13:13 PM

The behavior of the home builder stocks Friday morning was particularly strange as they all (BHS excepted) jumped in lock step. From there they drifted lower, with some actually closing in the red.

Maybe the MMM and AMD news was the catalyst for the retreat? And maybe the early rally was driven solely by program buying?

Who knows. Anyway, it's as if the early buyers were encouraged by the prospect that poor jobs == recession == end of rate hikes. Then again, recession == fewer home buyers == lower profits. The latter is more significant for the HBs, imo.

That little rally could be the final gasp of a necessary correction in a strong downtrend before the march lower resumes.

Thanks for a great blog, Barry.

Posted by: PeterB | Jul 8, 2006 2:19:23 PM

"i would suggest that the pre-announcement by MMM and AMD was what sold the market.... futures were fine before those reports , then turned down right into the cash market"

Not so fast!

1. AMD warned the night before

2. The initial futures spike was a knee jerk reaction to a 121K number, under the initial assumption - it was lower than expected so it means good news. Actually, it gets even more complicated: there is evidence that the number 121K had leaked before it was announced. (documented by unusual trading activity in bonds and futures before the announcement)

3. When the official data came out the futures initially spiked higher. It was the confirmation response that the number that leaked earlier was correct. The interesting part was that after examining all the data everyone noticed that wages were up 0.5% hourly and 0.8% weekly (inflationary big time) and 121K number did not look that good (the economy is slowing but inflation is picking up); and the futures started drifting down.

4. MMM warning was a catalyst expediting already underway drifting down process.

This is how I saw it last Friday (the above)

This is what other analysts were saying in the letters to their clients:

"Abhijit Chakrabortti, U.S. equity strategist at J.P. Morgan Chase (JPM) , said he expects earnings to grow just 7% during the second-quarter as information-technology companies, financial-services firms and consumer-focused businesses disappoint."The market will need to see a reasonable sized earnings beat combined with positive guidance for the third quarter and beyond for the second-quarter earnings season to provide a positive catalyst," he wrote in a note to clients on Thursday. Just meeting second-quarter expectations won't be enough because there are "rising doubts that any near-term earnings performance can be repeated" and increasing concerns about inflation and interest-rate risks, he added."

"Expectations for financials have been revised up," he said, but "we are concerned that bank earnings may modestly miss. J.P. Morgan's Chakrabortti said he is more concerned about commercial banks, which, due to rising rates, are going to have to start paying interest on deposits that, up to now, were non-interest bearing.

"Expectations for financials have been revised up," he said, but "we are concerned that bank earnings may modestly miss."

Analysts at Fox-Pitt, Kelton expect more than a third of the banks they cover to miss second-quarter profit expectations. "

"Oppenheimer's Metz said investors should be backing companies that sell to consumers in emerging economies. "That's where the growth in incomes and the standard of living will take place, rather than in the U.S., where things may stagnate, unfortunately," he said. "

Posted by: V L | Jul 8, 2006 2:57:22 PM

"Both of you are correct. The only difference is one counts all legal residents and the second one takes into consideration both legal and illegal."

Census Bureau estimates are for the entire population, with various techniques used to estimate the illegal component. The 300 million is the CB's estimate for the entire population (by this October), legal and illegal, rich and poor, democrat and republican.

See http://www.cis.org/index.cgi for more on this topic, or the Census Bureau site (www.census.gov) itself.

Without the illegal migration and higher latino/hispanic birth rate we would probably be suffering the same fate as much of Europe, Russia, and Japan in the years ahead, only adding to the economic and social distress we are already likely to face as our entitlement and pension costs come due.

Posted by: j. cameron | Jul 8, 2006 3:44:23 PM

No one mentioned that the bond market rallyed on friday, suggesting expectations for slower growth/rate hike over. Oddly, the yield curve also steepened, the opposite read. I'm currently finding gold an interesting indicator of "fed watch"--namely, when Bernanke comes out dovish or there is a less than great "data" point [suggesting they'll prematurely stop], gold rallies. It didnt friday, I suspect, because there was also wage inflation with the crummy jobs number and the Fed supposedly loves the ol' Phillips curve. Question is, are we heading for stagflation?

Posted by: HT | Jul 8, 2006 5:07:42 PM

"Without the illegal migration and higher latino/hispanic birth rate we would probably be suffering the same fate as much of Europe, Russia, and Japan in the years ahead, only adding to the economic and social distress we are already likely to face as our entitlement and pension costs come due."

Using your logic America should accept all 5 billion of poor citizens of the world (not only Mexicans) who wish to come here illegally as long as their birth rate is high. An estimated one-tenth, or 380K, of U.S. births in 2002 alone were to illegal aliens. There are many other poor and overpopulated countries in this world. Even purely from an economic perspective, moving to America has a lot of appeal. The average Mexican earns a twelfth of an American's wages. There are 4.6 billion people around the world who make less than the average Mexican.
Let’s all of them come here illegally, have high birth rate and save America!
Are you going to discriminate between Latino/Hispanics and other 4.6 billion?
You as many other illegals have a sense of entitlement. Illigals come to suppose they have some inherent right to impose themselves on another, sovereign nation.

“Census Bureau estimates are for the entire population”

The last “estimates” were done six years ago and there were no illegal Mexicans or other illegals responding to the questionnaires; therefore, illegals were not counted in the last census.

Posted by: V L | Jul 8, 2006 5:55:24 PM

Bond prices could have been lifted by a flight to quality as investors rotated out of stocks.

Posted by: Craig H | Jul 8, 2006 6:34:05 PM

Sorry I woke the illegal immigrant sector. Having worked in Geo Info Systems using census data I can say this - the census is just as political as everything else the gov does and is also a WAG. Remember in 2000 the Repubs refused to allow the census to upgrade their estimation methods. Wonder why?

But let's not get political - I take it all back. My point was simply this - the unemployment number was totally irrelevant to just about everyone in the world except for those who make a living cussing and discussing it. It proves nothing. Wages are going up? Really? When did that happen. My god that must mean inflation is coming. Nonsense.

Ok - let's take this a little step at a time. I saw corn in the supermarket today for 50 cents an ear (when it gets to be a dollar we can call it pirate corn - buck-an-ear ... never mind). Tomatoes a dollar a pound. The pizza that cost me $11 a month ago cost $13 tonight. Why? Because the fuel associated with all of these things has gone up. So if the employee needs more money to buy pizza so the pizza guy can stay in business because the cost of gas needed to both cook his pies and deliver them has gone out of sight - how can we say that wages are driving inflation? Why can't we say the price of gas is driving inflation because, yes, indeed, it is.

And I've asked this august board this before and I'll ask it again - how does raising interest on overnight loans cause the price of gas (the source of inflation) to abate?

That's right - it doesn't. Which means as I've said over and over again, the Fed is irrelevant to the process. Or, in the words of an old '60's hippie radical - if you ain't part of the solution - you are part of the problem. And the Fed is certainly not part of the solution. And the more I think about it the more I think we get a cut by the end of the year. Probably not but the odds keep going up.

Posted by: john | Jul 8, 2006 6:35:48 PM

'The last “estimates” were done six years ago and there were no illegal Mexicans or other illegals responding to the questionnaires; therefore, illegals were not counted in the last census.'

Again, not correct. The CB devotes a good deal of time and effort measuring what they characterize as the "foreign born," including illegal aliens. This is done through the census surveys and the yearly estimates. Here is the CB's definition of
"foreign born":

http://www.census.gov/population/www/socdemo/foreign/FAQ.html

Here a variety of survey/estimate data (including the 2000 census):

http://www.census.gov/population/www/socdemo/foreign/reports.html

Here's a summary from the 2000 survey on the foreign born:

http://www.census.gov/prod/2003pubs/c2kbr-34.pdf

This information is all readily available (again) on the CB site.

Regarding this:

"Using your logic America should accept all 5 billion of poor citizens of the world (not only Mexicans) who wish to come here illegally as long as their birth rate is high."

What was stated was demographic fact, not logic. It's well established what the demographic trends are here and elsewhere. The statement above has no bearing whatsoever and is a different topic.

Posted by: J. Cameron | Jul 8, 2006 6:54:42 PM

J. Cameron,

With all due respect you are changing the topic to fit it with your distorted world.

I am saying “there were no illegal Mexicans or other illegals responding to the questionnaires” and you are calling me wrong and providing me with the government definition of foreign born.
What is this definition has to do with illegals not responding to the questioners? Show me the data of how many illegals received the questionnaires and how many responded. Show me the data that the responders checked that they were illegals. Show me the data of how many “foreign born” checked that they were also illegals. There were none.

“Without the illegal migration and higher latino/hispanic birth rate we would probably be suffering the same fate as much of Europe, Russia, and Japan in the years ahead”

Without the illegal immigration we would be “suffering”? Are you calling the above nonsense “well established” and “demographic fact”?

I rest my case. There is no point of discussing anything with you because you are the type of people who will twist the facts and change the topic to support their agenda.

Have a nice day!

Posted by: V L | Jul 8, 2006 7:42:09 PM

"at least until the next round of Rate Cuts restarts the real estate machinary . . "

You really think lowering interest rates at this point will revive real estate? Case in point - Japan

Bluzer

Posted by: Bluzer | Jul 8, 2006 8:16:41 PM

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