NFP: Retiring the Over/Under Bet
A little over two years ago, I mentioned on Squawk Box that I was taking the "Under" on Non-Farm Payrolls.
Since that appearance, you may have heard Steve Liesman or Mark Haines
or Larry Kudlow talk about the Over or the Under. It was a cute device
that made fun of the dismal scientists in a good natured way.
My reasons for tweaking them were simple: Economists, using the typical post WW2 recession/recovery cycle, were over-estimating employment and growth, and under-estimating inflation. By betting they were overly optimistic, I was making a point about their methodologies, as well as the current economic environment.
My basis for this that we were not in a typical recession/recovery cycle, but rather, were in a post-crash environment, which has very different connotations and risk factors.
Indeed, even the Fed admitted (in today's WSJ) "that because of faulty inflation data, the Fed kept interest rates too low for too long earlier this decade, fueling speculative housing activity." Yes, they too under-estimated inflation.
Unfortunately, the time has come to retire the over/under. Given the magnitude of the subsequent revisions, adjustments, birth/death factors, benchmarkings and other statistical sleights of hand, the initial number has become totally marginalized.
This does not at all change my views about jobs, the economy or inflation. It is just that NFP has become, in a word, meaningless.
The most recent offense was the absurdly enormo BLS revision to their benchmark. It turns out that for the year ending March 2006, BLS now claims their monthly data understated payroll growth by 45 percent. Over that period, we are now told the data was off by 67,500 per month.
Based upon this self-admitted numerical bastardization, it seems foolish to put too much weight onto whether a monthly data point is 90k or 150k or 230k. If it turns out this single number is plus or minus a million per year, than the monthly data becomes worthless.
So as much as I am tempted to take the Under, I am retiring not just the bet but the entire process.
~~~
Today's consensus is for 130,000 new jobs, with a range of 75,000 to 180,000.
But I feel like Woody Allen (Alvy Singer) as a 9year old kid in Annie Hall, who discovered thermodynamic entropy:
Doctor in Brooklyn: Why are you depressed, Alvy?
[Young Alvy sits, his head down - his mother answers for him]
Alvy's Mom: Tell Dr. Flicker . . . It's something he read.
Doc: Something he read, huh?
Alvy: [his head still down] The universe is expanding.
Doctor in Brooklyn: The universe is expanding?
Alvy: Well, the universe is everything, and if it's expanding, someday it will break apart and that would be the end of everything!
Alvy's Mom: What is that your business? [she turns back to the doctor] He stopped doing his homework!
Alvy: What's the point?
Exactly.
What's the point of dissecting a number which may or may not be accurate to within plus or minus 45%?
More on this later . . .
>
UPDATE: November 3, 2006 7:47 am
Do not interpret this to mean that the market will ignore the number; Too hot a data point -- warts and all -- will end speculation of a rate cut anytime soon; Too soft a number further dents the goldilocks scenario.
>
Source:
Fed Official Says Bad Data Helped Fuel Rate Cuts,
Housing Speculation
GREG IP
WSJ, November 3, 2006; Page A6
http://online.wsj.com/article/SB116252441146012283.html
Friday, November 03, 2006 | 06:32 AM | Permalink
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» An Open Note to Steve Liesman from A Dash of Insight
Steve Liesman is a fine journalist. He is not an economist, but he has covered the economic beat long enough to understand the key issues. He can be depended upon to listen carefully and distill the key points of analysis [Read More]
Tracked on Nov 3, 2006 10:47:57 PM
» Using those employment numbers from Econbrowser
What do you do when one line of the latest government statistical release says that U.S. employment grew by 92,000 jobs during October, while 4 paragraphs later the same report gives the number at 437,000?
[Read More]
Tracked on Nov 5, 2006 10:05:08 AM
Comments
The point is that it is something to bet on. It doesn't matter whether or not it has any economic significance. Even if the number were accurate, employment is such a lagging indicator that it isn't useful for anything in particular.
Posted by: libertas | Nov 3, 2006 7:21:55 AM
question: does the statistical insignificance of the nfp report extend to average hourly earnings?
isn't this the important number, at least in the short term?
and do you take the over or under?
Posted by: Paul Davis | Nov 3, 2006 7:35:59 AM
It's still before the number is released, so I'll take a stab.
My guess is that anything above 200k would be a dramatic surprise and anything less than 25k probably would.
My guess (purely a guess) is that we may lose jobs this time, maybe 25k or more.
Posted by: Eclectic | Nov 3, 2006 8:25:17 AM
51K revised to 148K ?!?!? I guess now the enormo revisions will come monthly instead of annually. Ridiculous. Barry, your comments couldn't have been more timely.
Posted by: tick tock | Nov 3, 2006 8:38:37 AM
The numbers are completely useless now after the two huge revisions of previos numbers. I've got the numbers. I will ignore them.
Posted by: bob | Nov 3, 2006 8:45:04 AM
Unit labor costs is my favorite read on how much slack there is in the labor market. And it's been going in the wrong direction.
Posted by: S | Nov 3, 2006 8:45:08 AM
What Tick Tock said.
Who can take this stuff seriously? And the result is that we're left to guess at what employment, inflation and GDP growth actually are! I can't help wondering if growing official data problems aren't going to feed into uncertainty and confidence.
Posted by: Dave L | Nov 3, 2006 8:45:57 AM
Election politics. The unemployment rate is useless as they consistantly take the lower margins over the consensus, which is easily seen through and embarrasing. Then of course you have the end of expansion red herrings, see 2000 which makes it equally useless right now.
Though the job losses can be seen through in October, the tide of unemployment will be rising and maybe .5 jumps at time some months. Revisions down now will commence.
Posted by: Cherry | Nov 3, 2006 9:02:19 AM
So, is it a problem with the information that is processed, structure of the process, the process itself, or those who do the processing?
Is it accident, negligence, or corruption of the process?
Posted by: Jason | Nov 3, 2006 9:03:47 AM
Its not like the bls is telling people that the numbers mean anything. They are 90% confident that the actual number is between a loss of 343,000 jobs and a gain of 527,000 jobs. bfd.
Posted by: The Hube | Nov 3, 2006 9:07:59 AM
With these revisions that just happen to occur before the election....like "Lowest unemployment in 5 1/2 years" makes our government reported figures no better than Venezuela's.
What a shame.
Posted by: Josh | Nov 3, 2006 9:15:00 AM
You also must understand they "revised" the previous months up which caused the consensus to be lowered a bit(which they took the lowest possible number) for October though job cuts really increased.
This month was by far the worst looking report since 2003. Manufacturing losses and construction losses(from RE bust) starting to climb. They may have to revise downward. Consensus then rises, maybe a lot in November/December.
Posted by: Cherry | Nov 3, 2006 9:15:22 AM
Josh, I think you mistakenly added an "e " to the end of your last word.
Posted by: tick tock | Nov 3, 2006 9:25:04 AM
CNBC's Steve Liesman ripped you off totally -- he said pretty much EXACTLY what you wrote.
He should have just read your piece word for word.
Posted by: Andy | Nov 3, 2006 9:32:18 AM
Payroll is noise that is hard to pin down accurately IMO. The more important statistic is first time jobless claim filers........That's also pretty hard to screw up. It's controlled within one government agency and is an easy count. Or, at least it should be. With the government one never knows.
Posted by: BDG123 | Nov 3, 2006 9:41:24 AM
My guess of -25k was obviously wrong, but it doesn't feel so wrong.
Recessions don't begin from high unemployment, but rather from good times and high employment.
Employers at first attempt to hold on to employees, hoping their declining business contributions to GDP are short-lived. Once this is proven to be erroneous, then employers have no choice and don't hesitate to cut jobs.
Employment then declines even past the point that the economy begins to recover from recession.
It's a question of timing.
Also, let's put 92,000 jobs in perspective.
There are approximately about 3,500 counties in the U.S. (can't remember exactly; but middle 3000s), but I like to think of them as being 5,000 average 'illustrative' counties, each with a population of about 60,000. Then these counties have about two cities of 30,000 each. That is a representative picture of much of America.
What 92,000 means is that: an average county produced approximately 19 jobs last month, and an average city of 30,000 produced less than 10.
That's not the powerful economy that's the "greatest story never told."
Roubini has been right on forecasting GDP changes (not sure what he's said about jobs lately), and if he continues to be correct, the days of even 92,000 new jobs per month may run out soon.
It's all a matter of whether we manage to pull a soft landing out of the hat.
Posted by: Eclectic | Nov 3, 2006 9:42:45 AM
Andy,
It happens all the time; CNBC, WSJ, Barrons -- I take it as a compliment.
And note: Steve Liesman has published here previously: How the Fed Chief Gains Credibility
Posted by: Barry Ritholtz | Nov 3, 2006 9:56:16 AM
So how is the non-manufacturing ISM actually a coded message for impending doom?
Posted by: Macro Man | Nov 3, 2006 10:03:06 AM
150 k /month is old stuff..fed has adjusted it to 100k/month..90 k , if true, is not a bad number abd infact iss inflationary...
hence the 10 yr yield jumped
Posted by: andiron | Nov 3, 2006 10:03:11 AM
How can the market not demand a higher equity risk premium when the economic data are totally inconsistent and unreliable causing the bond market to sell off hard? Instead, they buy equites. VIX and VXN decline. Bizzaro world.
Posted by: S | Nov 3, 2006 10:13:04 AM
73.000 from the 92.000 (80%!!!) are just a creation of the bls from their black box "birth death model". this gets more curios when you compare the 06 numbers with the 05 oktober number wich assumes that 57.000 were somehow createt. in 05 the economy seems to be way stronger then today. (maybe this is relatet to the katrina).
http://www.bls.gov/web/cesbd.htm
have a nice weekend
Posted by: jmf | Nov 3, 2006 10:38:19 AM
Also to add, a big chunk of the jobs revised upwards were government jobs. Big Government Bush at it again lol...........
Posted by: Cherry | Nov 3, 2006 11:48:16 AM
I have posted here several times in the past about just how useless this number was. With large up and down revisions on a regular basis. Glad to see others are now agreeing
Posted by: Hockeyman77 | Nov 3, 2006 12:11:46 PM
Data was captured in the field, sent to a secret prison, was shocked and waterboarded. Days later data said the economy is great. Is it surprising that data is tortured by this administration especially when there are no data rights organizations. The stakes are too high to be restricted by outdated conventions.
Posted by: Neal | Nov 3, 2006 12:24:29 PM
I wonder if it might not unnerve the market a bit to realize that it does not have reliable jobs data to use. That might be the most significant "data" in this data, the fact that there is no usable data. Which could be scary if jobs data seems inherently impossible to gather; scarier if jobs data is seen to be made unavailable.
Posted by: Kevin Rooney | Nov 3, 2006 1:30:24 PM
