Economic Data and the Employment Report

At “A Dash” we believe in letting the data drive our conclusions.  This can be boring, since everyone wants strongly held and argued opinions.  In case you do not see the disagreement, CNBC even shows you a crashing bull and bear.

Today’s Data

The economic news will provide the headline reason for today’s selling, so let us take a look.

  • Q407 GDP was revised downward, now carrying a “minus” sign.
  • Q108 was revised downward by 0.1% (Yawn)
  • Q208 came in at +1.9%, below the consensus estimate of 2%+
  • Initial jobless claims spiked to 448,000

How to Analyze

The most quoted commentator on economic data must be Barry Ritholtz, one of our featured sources.  Whenever there is a fresh piece of economic data, we turn to The Big Picture to see what might be wrong with it.  We tried to look at the data as Barry might do.  Let us ask what data is fresh and what is old.  Let us look for one-time anomalies and not make too much of them.  Barry is taking off on vacation (as we did last week) so let us try to pinch hit.

  • Q407 GDP — Who cares?  Old news.  We all know that the economy has been weak and below trend for a long time.  Does it matter whether it is an “official” recession that we do not know about? (more later on recession dating)
  • Q208 GDP — Big inventory drawdown.  Will it come back?  Do companies know what they are doing in reducing inventories?  This is always subjective.  One can say that the companies know, so the inventory drawdown is real.  That was NOT true in Q407, thus the rebound in 2008.  Whatever one’s viewpoint, inventories are thin at mid-year.  Something to think about for the second half.
  • Spike in initial claims.  Phil Izzo at the WSJ did a great job on this one.  In his article, Economists React:  Jobless Claims “Overdoing the Doom, one of his sources reported the start of a Federal program of extended benefits.  When the federal program began, the process uncovered many people who had not claimed state benefits.  They all piled in this week, so something that might have been a couple thousand a month over many months all showed up this week.  This is a noisy series anyway, so we always use the four-week moving average.  Wow!  That is the kind of scoop that Barry would be all over.

In short, the news was a little negative, but no big deal.  With this analysis in mind and with bated breath, we clicked on The Big Picture for the official answer.

We Struck Out!

Drat it!  Our approach missed Barry’s official analysis by a mile.  Barry tell us that this is an ugly, recession set of data.

To our surprise, he is also confident that the current quarter GDP figure will be revised down quite sharply.  He writes as follows:

Bill King observes that the GDP Price Index inexplicably tanked to 1.1% in Q2; 2.4% was expected. Nominal GDP declined to 3% from Q1’s 3.5%. Thus, the Q2 GDP benefited by 1.5% points, thanks to the mysteriously collapsing GDP Price Index, down to 1.1% from Q1’s 2.6%.Hence, I expect Q2 2008 GDP to eventually get revised downwards to 0.4% or worse.

To summarize, we missed the official Ritholtz analysis, which says that the world is much worse than the numbers suggest.  We are not sure why Barry is so confident about revisions.  Or inventories.  To us, these are dependent upon late-arriving data.  We have no confidence about the direction of changes.  We shall revisit this prediction with interest.

The Employment Report

Regular readers of “A Dash” know that we change opinions when we see changes in the data.  We have been pretty pessimistic on the market over the last couple of months, and we have expected major declines in the monthly non-farm payrolls.

This month is an unusual situation, so we are not making our normal comment.  (Check out last month for a typical comment.)  We usually discuss the monthly change in non-farm payrolls with respect to various other indicators.  We have stressed that this is not a causal relationship.  The measures are all mostly effects of the same economic phenomena.  The unusual circumstance is that one of our key indicators, the ISM index, will be announced after the non-farm payroll number.  Since the ISM index is always reported on the 1st of the month, this is very unusual.

For the moment, let us just say that if the ISM report is in the 49-50 range, as expected, we expect a job loss of about 90K.  This is much weaker than the ADP forecast, and slightly weaker than most economists.

To the surprise of most, it is possible to lose jobs at this pace and still have a positive GDP.  This is because of productivity gains.

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  • Murray Trillionaire August 1, 2008  

    Maybe if we all just ignore this recession it will get bored and move to Canada.

  • Vermont Trader August 1, 2008  

    “In short, the news was a little negative, but no big deal.”
    I disagree, when real GDP misses projections (on which many top down earnings projections are based) in a quarter with massive stimulus and a lower than expected deflator it is a big deal.

  • gaius marius August 1, 2008  

    sorry — i misrepresented karlsson’s method — he is deflating gross GDP using the gross domestic purchases deflator, not CPI.

  • gaius marius August 1, 2008  

    sorry again — my first comment is held for moderation, probably because of the number of links in it. i reposted it here:

  • Lord August 1, 2008  

    You seem to think revisions are random, but aren’t they highly correlated at turning points?

  • Jeff Miller August 1, 2008  

    Gaius Marius — Thanks for the pointers. I have published your comment which did hit the spam filter for some reason. This happened despite the fact that you are on the list of valued contributors.
    Sorry, and thanks for your viewpoint.
    I hope to have something soon on the BLS Birth/Death issue, perhaps the most widely mis-interpreted data out there.

  • Jeff Miller August 1, 2008  

    Lord — NFP revisions are strictly a result of those firms not reporting.
    Do you have something suggesting a different interpretation for other revisions?
    And please — you say that revisions are correlated at turning points. Just when is the “turning point”? The bearish argument is that it was last November or December. So why does that argument apply now?
    This is one of those slick phrases that continues the process of frightening most investors: Don’t trust any data.
    What do you think?

  • Jeff Miller August 1, 2008  

    Vermont —
    Top down analysts have been undercutting the regular analysts for many months. They were basically wrong for several years. They have been more accurate when financial stocks took write-downs.
    I have had excellent results, beating the market by a wide margin for ten years, by ignoring the top-down analysts. I urge you to consider this approach.
    Many of them are quite arrogant and have little real basis for their approach. I like the idea of having hundreds of scouts looking at companies…
    Just a thought…

  • Mike C August 6, 2008  

    Maybe I’m not clear on what you are saying here, but are you suggesting the entire concept of a “turning point” is entirely bogus?
    It is probably impossible to identify an exact date as the “turning point” for say overall economic growth and/or forward estimates for corporate profits, but obviously things have gotten significantly worse compared to what many perma-bullish??? (personally I think the use of these perma terms are distracting but the term perma-bear gets thrown around a little too cavalierly) prognosticators were forecasting 12 months ago in August 07.
    I think it is safe to say that many with bearish/pessimistic leanings were incorrect for basically a few years (05, 06, some of 07) while many with bullish leanings did in fact miss the “turning point” where the economy began to weaken and forward profit estimates began to come down and down and down.
    Of course, the difficult and useful question is “where are we at now”? Are we near the trough of both the economic and market cycle, and can expect economic growth to strengthen and forward profits to get revised upward, or are we in the 2nd inning as Roubini puts it?

  • Jeff Miller August 6, 2008  

    Mike — I think that it is fine to look for turning points, but that should be the focus. The top down analysts were predicting a turn for years, and underestimated profits as a result. The economic data suggest that things peaked about eight or nine months ago. If/when a recession is declared, that will be the official start date and therefore the turning point. I agree that we should be looking for the next turning point 🙂