Forecasting with Predictable Inexactitude

Saturday, February 04, 2006 | 06:57 AM

The title to this post comes from Barron's Alan Abelson in this morning's column. It refers to the usual-suspect Street seers, and their ongoing forecasting failures regarding the monthly employment numbers.

Indeed, the overly rosy expectations managed to take an otherwise respectable NFP number, and snatch defeat out of the jaws of victory.

"A fresh example of this last inevitability was the manic rush among the cockeyed heirs of Nostradamus to put their bets down on a really big number for January job additions. The consensus started out at 250,000, but in the days leading up to the release of the report from the Bureau of Labor Statistics, there was a veritable stampede among the prognosticating herd on the Street to up the figure to at least 300,000, and those in the know confidently declared the "risk" was up to the upside. (Characterizing a possible increase in new jobs as a "risk" strikes us as the equivalent of saying there's a "risk" of the bird flu not coming to the U.S., but we guess we just don't dig the lingo.)

As it happens, they were off the mark a trifle -- by anywhere from 60,000 to more than 100,000. In fact, the actual number was 193,000, which wasn't bad at all, especially since the previous two months totals were revised upward by over 80,000 in the aggregate. What's more, hourly earnings rose a solid 0.4% and the unemployment rate shrunk to 4.7%, the lowest since July '01. And, for once, there didn't seem to be anything hokey about the upbeat report."

While the NFP numbers were respectable, the markets focused on the hourly earnings increase, and then promptly sold off.

The Street is amazingly backwards on inflation.

They see inflation where there is decidely none, and ignore everywhere else, despite the ongoing increases in price. Indeed, the onbly place where there is little in the way of inflation is wages, which are actually negative relative to inflation. There is plenty of slack in the Labor Market, with participation rates remaining stubbornly low. There is no wage pressure, as the threat of outsourcing and layoffs remain ever present. All recent Union negotiations have revealed the utter lack of leverage of Labor.

Back to NFP: The Liscio Report's Philippa Dunne and Doug Henwood take the numbers apart:

The inordinately warm weather last month played a significant role in goosing employment, as evidenced by the 46,000 jobs added in construction.

We've no doubt that you'll be pleased as we were to learn that the great boom in bar and restaurant hiring continued apace in January and that, in the past four months, this bracing sector has chipped in one of every seven new jobs, or, as Philippa and Doug point out, over twice its share of total employment. We'll drink to that.

They sum up the January jobs report as "encouraging but hardly gangbusters by historical standards." And they also note that "throughout this cycle, the job market has many times begun to look forward toward the beginning of the year, only to fade in the late spring."

Still, Philippa and Doug caution, the strength in hourly earnings, coupled with that seriously disappointing productivity showing in last year's fourth quarter, could irk the Fed. To the point, they cite a speech that the new chairman [Bernanke] gave last year in which he warned that were productivity to weaken and labor costs to rise, it would probably be reason enough to nudge the Fed toward tightening. He added he didn't expect that to happen (proving himself as much of an errant forecaster as his predecessor), but, as our perceptive pair comment, "there are now signs it may be happening."  (emphasis added)

Obviously, the prospect that the Bernanke Fed might decide to continue to turn the screws beyond March, contrary to a gathering hope on Wall Street, was not the least of the things unhinging the market last week. And just as obviously, whether it proves on the money or not, the fear of a further extended stretch of rising rates is not the prescribed nutrient for a frisky stock market.

Of course, as we discussed earlier this week, the end of a Fed tightening cycle is no panacea for the markets . . .


The Great Accommodator

Saturday, February 04, 2006 | 06:57 AM | Permalink | Comments (0) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



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