The market has the regular monthly focus on the employment situation report. An hour before Friday's opening the data will be announced. It will be sliced and diced by various experts. Assorted pundits will be poised to offer comments via email to those in the MSM blogs or anchors on CNBC.
The report has so many different aspects that it is the happy hunting ground for spinners. For many months it has proved right to be cautious, if only because the bearish spinners seem to get the attention. We have traded the report from that perspective. Even when the number was better than expected, it is usually possible to trade out with a modest loss.
Job Creation
One reason for the loss of confidence is the breakdown in the Bureau of Labor Statistics (BLS) model for the birth/death adjustment. We described this in some detail last month. Since then we have actual data from state employment reports.
Here is the information from the latest Business Dynamics Report.
There are two key things to note:
- There is still plenty of job creation. This always occurs, even in a recession, but it is usually ignored by analysts. Gross job gains were 4.6 million in Q109 at existing establishments and over 1.1 million at new establishments.
- The difference in job creation and job losses weakened in the post-Lehman era and plummeted in Q109.
This dramatic decline was the cause of the breakdown in the birth/death adjustment. Readers should note that the BLS estimate still needed to add job creation. This is in dramatic contrast to the many critics who remain skeptical than any new jobs are formed, despite the actual data count.
The problem is that estimation methods that had worked well for many years, including the turning point at the start if the recession, broke down early this year. The credit crunch had an effect on new business formation, something greater than in the last recession, as the chart shows.
Employment Report Background
We have urged that market observers should view the BLS report as one of several measures of changes in employment, not as the "official" result. The BLS method attempts to count every job in the economy in one month, count it again in the next month, and report the difference. Using this method, the BLS has no choice but to make an estimate about job creation. Later, they benchmark against known data.
We explained this carefully last month, but it bears repeating:
Each of the sources we cite is attempting to measure the actual net job change. A wise stat prof once said, "Suppose God whispered into your ear and told you the TRUTH."
The BLS is attempting to do the same thing, with dramatically different methods. The BLS result is not TRUTH. It is a statistical estimate. Actual TRUTH for a specific month will not be known for many months, when the state employment data are analyzed. The BLS tries to count all of the jobs in one month, all of the jobs in the next month, and then report the difference. They do this very well, but it is inherently difficult. It does not focus direclty on the actual changes, as other methods attempt to do.
Meanwhile, the forecasters will all be graded by how well they predicted the BLS number -- the BLS estimate of TRUTH.
That is the wrong attitude. The BLS number is just another estimate -- and one which will not be official until all of the revisions are in. Despite this, the market will trade on the preliminary estimate revealed Friday morning.
Our Approach
Each month we ask the question, "What change in payroll employment would be consistent with other economic data from the same time period (the middle of the prior month)?
This is not a forecast, per se, since we do not posit any causal relationship among these variables. They are all concomitant indicators of economic activity.
- We use the four-week moving average of initial unemployment claims, culminating in the week of the employment survey. This is the best direct indicator of new lob losses. This has improved in the last three months to a loss of 513K. Note that the most recent dramatic decline to 466K is not within the survey period.
- We look at the University of Michigan sentiment survey, which we found more useful than the Conference Board's sentiment index. Michigan uses a panel, where some families are carried over from month to month. This is a good technique. Sentiment is influenced by employment. When people have lost jobs, or are worried about losing jobs, it shows up in sentiment. It is a good concurrent indicator. The Michigan index is now at 67.4, down significantly from the last two months.
- We us the ISM manufacturing index, which declined to 53.6 from 55.7 This is still quite bullish for the overall economy, but the downtick is bothersome.
Our long-term record has been pretty good, especially when compared to the final revised data. This makes sense because our model was derived from the final data. In recent months we have been too bearish. The BLS benchmark revisions suggest that we have been much better than first thought.
Our estimate is for a net job loss of 175,000.
Other Forecasts
It is always interesting to compare the job forecasts from different sources. We follow several because of the interesting and widely varying methods they use. A wise interpretation would be to consider all of these disparate sources of information.
ADP has proprietary data because of its payroll management business. ADP sees losses of 169K.
TrimTabs also uses real time data. Their estimates are based upon tax deposits for salaried employees. They see a net job loss of 255K.
WANTED Technologies, a relatively new entrant in this field, has a model based upon online help-wanted advertising. This is an innovative and different approach to real-time data. They see a net job loss of 155k.
Briefing.com cites the consensus as a loss of 125K and their own forecast is a loss of 150K.
All of these sources are valuable. The 90% confidence interval on the BLS estimate, something that no mainstream media sources report, is +/- 100K or so. And that is after revisions and benchmarking. It is a survey -- a good one -- but it has an error band.
Investment Conclusion
Businesses reduced employment dramatically and swiftly last autumn. Job creation has lagged. Employment is an important indicator for politics and for the average citizen. It continues to be a lagging indicator for investors.
