NFP Day (plus, ADP update)
*Sigh* Another month, another Jobs number.
My thinking about all aspects of this monthly exercise has evolved. I have gone from regularly taking "The Under" -- a winning bet until we retired it -- to something more philosophical (dare I say "profound?"). We have come to recognize that the initial release of the NFP data by BLS is a number subject to such significant revisions that it is not of use to investors; Traders can play for a rally or a fade by identifying when Job sentiment in either direction gets excessive.
I used to be surprised/dumfounded/shocked by the initial reads. Now, I merely shrug and acknowledge that the hard number is of little value. The relative performance to prior cycles, and the overall trend (acceleration/deceleration) is all that matters.
The data from both BLS and ADP is not consistent with a strong economy. Remember, it takes about 150k per month to merely keep up with population growth -- in other words, 150k new jobs per month is zero job growth as a percentage relative of total population and the labor pool. We were adding 250k-300k per month in the 90s, and even just two years ago when the housing boom was in full swing the numbers were in the 175-225k.
So where are we? As the chart below shows, this remains one of the weakest post-recession job creation cycles in the post war era. And as we have seen over the past few quarters, even that modest pace of job creation is now decelerating. Following the ADP report (more on that below), there is very little expectation of much strength. That makes for several potential surprise outcomes (you can do the math yourselves).
>
Chart Courtesy Spencer England Equity Review (SEER)
>
Back to NFP: With ADP showing job gains of only 57,000 (the lowest since July 2003), and job growth revised down to 121K last month, the consensus for NFP of 95K might even be high. The trend is decelerating job growth as the economy slows.
~~~
Back in January of this year, I gave a quasi-mea culpa about the ADP Report:
"Note: I used to mock the ADP data as being so awful, but since the big BLS revision, ADP turned out to be more accurate than originally appeared. While the jury is still out, I am trying to remain open-minded about their analysis;"
The original ADP data appeared to be wildly off from BLS. ADP's accuracy rate improved significantly., once BLS did their revisions. One can hope that the competitive pressure from ADP might spur BLS to become more accurate in their earlier releases. So I am grudgingly moving towards giving them a small bump up in credibility.
I still retain my criticism that ADP is not a neutral observer. Indeed, I retain my grave reservations about the entire trend towards non-government, non-academic entities with a vested interest in a particular outcome releasing these Econ data as a form or marketing/PR. ADP is but one in a series of private firms/associations that do this, including NAR, ATA, NAHB, ICSC, etc. And while much of the data is worthwhile and helpful, some of the bad apples -- especially those potentially interested party in the outcome -- do spoil the entire bushel. (I can show you many ways the NAR data gets gamed).
Back to ADP: According to a spokesperson for the firm, they have been working to improve their process:
* Quadrupling the size of the sample from the average historical sample size
* Improved outlier detection
* Enhanced seasonal adjustment procedures
* Reporting of industry and firm-size data
As I told them, I am retaining an open mind -- more out of frustration with BLS than anything. There is a definite space in the market for better NFP data, and if ADP keeps improving their methodlogy, they might shake up BLS a bit.
UPDATE: March 9, 2007 2:55pm
Just a statistical correction to note: The Birth Death adjustment goes into the total employment count, not just the monthly totals -- do not assume that 118k was tacked on to February, or 175k was subtracted from January monthly changes -- I believe these guesstimates are incorporated into the entire Employment total (i.e., 144.6 million), then the monthly numbers are deduced.
Yes, its somewhat fictional, and creates an inherent bias in the overall model, but its not like they are merely tacking on 100k per month . . .
Friday, March 09, 2007 | 06:45 AM | Permalink
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Tracked on Mar 9, 2007 8:21:38 AM
Comments
Today is the most important data point of the week, by way of Non Farm payrolls, now expected to rise 95K following last month's 111K rise. If inline, the number would show the slowest rate of job growth in two years, and would be just about half of the average job growth during 2006. As well, it is well below the amount of jobs necessary just to keep up with the growth in the labor force. The report comes on the heels of the ADP report which showed growth of 57K private sector jobs, as well as an increasing level of jobless claims. Assuming 25Kish Gov't jobs were created, the risk appears to be to the downside in the employment number. But as I've said throughout the week, the number is subject to wild revisions and thus, in practical terms, it's rendered useless for the most part. Avg hourly earnings exp to rise .3%. Also at 8:30 is the Trade Balance, exp to fall to -$59.8B from -$61.2B.
Posted by: Dan | Mar 9, 2007 7:50:32 AM
The very latest implied forecast from the CME Economic Derivatives forecast is indeed lower than the analyst consensus. Right now, it is at 75.5 K.
I like this number better than the Bloomberg consensus because it is bang up to date, incorporating all new information in the market (ADP report, etc). Of course, this doesn't mean it's significantly more accurate, but it does contain more information and its from people who are putting hard cash on the line.
http://auctions.cme.com/
Posted by: Caravaggio | Mar 9, 2007 8:03:35 AM
Employment may have peeked last December, starting to trend downward, even after upward revisions. February screams lower revisions(for the first time since?). If March comes in weaker yet?
Posted by: Cherry | Mar 9, 2007 8:55:50 AM
what a joke.
lets do the math. 118.000 jobs via the black box "birth death model" (vs 116.000 in 2005 were the economy wasn´t in a downturn) and of the 97.000 created were 39.000 40% government jobs. ouch! very very weak.
http://immobilienblasen.blogspot.com/2007/03/employment-report-feb-2007.html
Posted by: jmf | Mar 9, 2007 9:06:36 AM
what a joke.
lets do the math. 118.000 jobs via the black box "birth death model" (vs 116.000 in 2005 were the economy wasn´t in a downturn) and of the 97.000 created were 39.000 40% government jobs. ouch! very very weak.
BLS the next to be whistle blown lol? Only reason why UE rate dropped to "4.5%" was because of the dropping LFP. Very very suspicious so far this expansion that LFP has been. Just think if they got caught.............The UE rate has been "off" since the recovery got underway in middle 2003 and the economy has only grown about at the historical average which implies 5.1-5.5 UE rate. Something stinks in the state of Neo-conmark.
Posted by: Cherry | Mar 9, 2007 9:19:41 AM
I'm not arguing that this is a strong jobs recovery, but frankly, I'm sick and tired of people comparing various economic statistics to "the 90's". For whatever reason, the 90's were an uncommonly strong time economically, and they ended in a more severe than normal bust! You have to look at the complete cycle, all the way through the dot-com bust! And more importantly, the 90's boom evolved from a more severe economic trough than we had before this recovery (I think).
I think it stands to reason that the milder recession, the milder recovery. The initial job loss was less, so the job gain on the other side has less "low hanging fruit" to pick off. How about some "normalized" charts? Show us the monthly jobs growth/decline or something from peak to trough to now. The raw numbers by themselves are apples and oranges IMHO.
Posted by: Mike | Mar 9, 2007 9:21:24 AM
I'm not arguing that this is a strong jobs recovery, but frankly, I'm sick and tired of people comparing various economic statistics to "the 90's.
I am also sick of your whining Mark when this expansion is supposed to be "close" to the 90's. The BLS may be just another bigger picture of Neo-con mind games and lies, a few slips of the LPF rate will do such a thing. A 5.3%UE rate isn't as sexy as a 4.5% rate, and in the mind of the invester, a HUGE difference. The fact is, I am not the only one that has had suspicions about them since the 2003 recovery got underway. It simply doesn't add up.
Posted by: Cherry | Mar 9, 2007 9:35:10 AM
The Fed has been conducting 1 day repurchase agreements [“repos” or short-term loans] for much of the past week in amounts ranging from $4-7 billion. These funds recently have been done beneath the Fed Funds rate. Thursday's 14-day $15 billion repo gives the dealers two weeks to do something with the money. Two more weeks of asset inflation in the stock markets, anyone? I'm email Bernanke today with a sharp message about prudent stewardship .
Posted by: OldVet | Mar 9, 2007 9:39:15 AM
While I am no economist, I generally do not view this current recovery as a recovery. When you are just borrowing against equity (MEW) to maintain your standard of living that is not a growing economy IMO. Especially when you look at the graph of the growth minus MEW.
Posted by: metroplexual | Mar 9, 2007 9:44:41 AM
"Indeed, I retain my grave reservations about the entire trend towards non-government, non-academic entities with a vested interest in a particular outcome releasing these Econ data as a form or marketing/PR"
BR, that's a fair point, however, I hope that you have even graver reservations about government entities with vested interests releasing data.
Posted by: joe | Mar 9, 2007 9:49:00 AM
"I am also sick of your whining Mark "
Lol...want some cheese with YOUR whine Cherry??!
Posted by: Fred | Mar 9, 2007 9:53:33 AM
Fred, the Easter Bunny was upset that his eggs doubled in price in the last 3 months, but with the increased liquidity in the markets, he feels he will be able to make a profit. But the cooks preparing the Easter dinner have been crying while peeling the onions cuz the cost of da onions also doubled.
Posted by: Teddy | Mar 9, 2007 10:17:18 AM
barry or anyone,
ge has been a good barometer for future market direction. over the past month or so it can't even catch a bid when we bounce. furthermore, based on the ratio of ge:spy it's about as cheap as it has been in the last decade (relative to the index). if instutional money is running from the protective shoals of a mega cap company such as ge, does this bode ill for stocks in general. i see it as pretty bleak for future market expectations.
Posted by: erik | Mar 9, 2007 10:52:25 AM
from Mike:
For whatever reason, the 90's were an uncommonly strong time economically, and they ended in a more severe than normal bust! You have to look at the complete cycle, all the way through the dot-com bust! And more importantly, the 90's boom evolved from a more severe economic trough than we had before this recovery (I think).
So the 90's ended in a more severe than normal bust, which was actually a very mild recession? How was it a severe bust and a mild recession at the same time? Can't people still make arguments that don't refute themselves?
Posted by: jkw | Mar 9, 2007 11:43:04 AM
No fundamental differences in anything existed from the period seconds before the BLS release to seconds after.
However, the net observation to any reasonable and logical observer is that both ADP and BLS are indicating a slowing of the increase in jobs. See the data and observe the charting and you must agree or deny the data:
http://tinyurl.com/nz4j9
http://tinyurl.com/2b2g5k
According to the underlying mathematical functions that must express the dynamic that would ultimately reveal a declining job market, that same function of "X" or [F(X)] must have a first order derivative, or [F'(X)] "F prime at X."
In theory that prime can never reverse to negative from a positive without first proceeding incrementally (regardless of the size of the increments) though positive expressions of prime. I'm talking about the slope of the curve, and it still must reverse through "O" and probably do this before we can see a truly statistically significant reversal occur. I believe this is still true even with an atomic explosion, although the reversal happens pretty quick I'm told.
We'll see if this reversal that is hinted at by both ADP and BLS continues over the next few reporting periods or not, but the bond market running from this report today is of no consequence to the underlying trend, as yet, whatever it turns out to be.
None of this changes the last two very specific, and in my mind almost prayerful, speeches of Mr. Bernanke.
I'll say again, as I've said before... having a current opinion that ADP is not accurate is absurd when the data are examined in comparison to the data from BLS.
One may intend to demonstrate a macroeconomic transition and, through "willfulness" prefer that the data support that opinion... however, the data is in the realm of science and beyond opinion, mine or anyone's.
Posted by: Eclectic | Mar 9, 2007 11:46:52 AM
The numbers are as expected (eventhough many expected much lower), the consensus was 95-100K.
In addition, 39K (~40% of 97K) were government artificially created jobs (the government is out of control, it keeps borrowing and spending). Moreover, 31K were education and health services (another subsidized by the government sector through Medicare). (Leisure and government combined for 70K new jobs)
The numbers are OK, but they are not suggestive of a "strong economy" (as some market cheerleaders bubbleheads keep lying about it on TV). I am concerned about the government out of control borrowing and spending to create these jobs.
I am concerned about this fact from the report:
“The Labor Department Friday said hiring last month in goods-producing industries fell by 71,000. Within this group, manufacturing firms cut 14,000 jobs, while construction firms shed 62,000, the steepest monthly decline since January 1991”
Posted by: V L | Mar 9, 2007 12:16:17 PM
While I think the BLS is a bunch of imcompetent yahoo's, even their numbers have beeing showing this easy:
1.Growth output began falling last Augest.
2.December labor output crested.
The economic boom is over(if there ever was one). Consumer spending is fading during the 1st quarter and I suspect 1st quarter PCE to take a major hit in February. 0-1.5% growth Q1 2007, projects will get stalled, employers will rebuild stat sheets by laying off workers. Usually that indicates the actual beginning of the recession itself, thus a recession is unlikely through April. Though after April, all bets are off.
Not in a recession yet, but the potential is there. Which we couldn't say in 2006.
Posted by: ac | Mar 9, 2007 12:19:32 PM
I'm glad you are starting to see the light Barry. I have said several times before on these pages that I always knew the ADP data was better than the BLS data - because I know both organizations.
I will also repeat that 'capital' has been empowered (at the expense of labor) in the current economic expansion due to the tax cuts on capital gains and dividends. If you folks don't understand basic economics you are doomed to continual confusion.
This is a different kind of economic growth period than we have had in many, many years.
The Fed has been a problem.... but, the economy is doing OK in spite of them. (the Fed has created all of the inflation that we currently have by raising rates when they did NOT need to)
Oh well.... even worse mistakes have been made in the past. These guys are only at the B- level. That is better than an F (that Greenspan earned several different times)
Posted by: diva | Mar 9, 2007 12:29:54 PM
PS: I currently work for a small company that has gone from 2 to 21 employees over the last 5 years. We do not use ADP. Quickbooks and Peachtree and other accounting tools allow very small companies to do their own payrolls. Mid-size companies use ADP. So: ADP also misses a large segment of the working/employeed world. They are just much better at 'real-time' data collection than the Govt. (duh)
Posted by: diva | Mar 9, 2007 12:37:02 PM
How can you say ADP data is better when ADP data is designed to track the BLS data?
And in case you missed it, the reason why ADP just revised their entire methodology was because their real-time forecasting was failing.
Posted by: Steve | Mar 9, 2007 12:54:48 PM
I can see that ~150k people are added to the US population every month(https://www.cia.gov/cia/publications/factbook/print/us.html
gives the data), but how do I know how many people are entering the labor force each month? This is (number people newly of employable age) - (number people retiring) rather than (births - deaths) which is surely affected by the baby boomer bulge...
Posted by: Alex Dannenberg | Mar 9, 2007 1:13:19 PM
Check out the margin of error:
The confidence interval for the monthly change in total employment from the household survey is on the order of plus or minus 430,000. Suppose the estimate of total employment increases by 100,000 from one month to the next. The 90-percent confidence interval on the monthly change would range from -330,000 to 530,000 (100,000 +/- 430,000).
These figures do not mean that the sample results are off by these magnitudes, but rather that there is about a 90-percent chance that the “true” over-the-month change lies within this interval.
Posted by: Barry Ritholtz | Mar 9, 2007 2:56:47 PM
Jobs data needs more data collection. Maybe it exists but isn't widely reported. Quintile wages need to be implemented instead of a single average wage.
Service sector jobs (I chat at stores) many folks in this sector are 30 hours or less a week so benefits don't kick in. This means nearly 2 people are needed to fill a work week job slot.
And I think unemployment numbers don't reflect people going in and out of the job sector if they are in and out for weather & holidays and do not build up unemployment benefits. This effect can be gamed by a controlling government.
And I'll second the notion that government jobs although required are actually a net job neutral condition because taxes pay them. If everyone had a government job would that make us a socialist or communist country?
Posted by: greg0658 | Mar 9, 2007 4:12:19 PM
Yes, Barringo, so wtf are you attacking ADP?
Posted by: Eclectic | Mar 9, 2007 5:14:40 PM
I must say that the majority of posts on this subject prove that the posters are a bunch of ignorant futhermuckers.
Posted by: Eclectic | Mar 9, 2007 5:21:00 PM
