Employment Report Disinformation
Each month the market reacts to the employment situation report, consisting of a survey of establishments and a survey of individuals. There is a lot of information and the methodology is complex. This creates a great opportunity for "spinning" the data.
Frankly, we do not know the motives of the various sources that consistently seek the worst possible interpretation of each new data point. The difficulty for most traders and investors is that they will not study the data enough themselves. Even if they did, almost no one has the methodological skill to evaluate what they see. This leaves nearly everyone at the mercy of those purporting to be experts. Some of these sources are well-intentioned, but mistaken. Others may simply have another agenda.
At "A Dash" we are quite willing to be led by data. Regular readers (and our investors) know that we will sell and even sell short stocks as the circumstances dictate. We are bullish, but not perma-bulls. We are consistent and objective observers of the market, as our investors from the 2000 era know well.
The problems relate to three different issues:
- The Birth/Death adjustment. Monthly job creation is about 2.5 million jobs. For many years the BLS assumed that establishments not responding to the survey were replaced by new establishments with the same number of jobs. A few years ago they realized that this method under-estimated actual job creation, so they implemented an adjustment. This was based upon many years of analysis and is reviewed twice a year, comparing it to actual data.
This method has worked very well. It has improved the estimate of employment, by actual count, in every year since it has been implemented.
Ignoring these data, leading critics (including Ritholtz, Kasriel, Abelson, Maudlin, Norris, and others) focus on the adjustment and not the overall problem of estimating changes in establishments. Some of the critics confuse total job creation with the increment from the adjustment.
We have a simple challenge for these critics: In the years since the birth/death adjustment has been adopted, has it improved the estimate of overall payroll employment? Has there been any single year in which the adjustment has made the overall estimate worse?
Check out this comment from former Dallas Fed Pres. Bob McTeer to confirm our analysis.
- The Bar. Those wishing to minimize economic progress claim that the needed monthly job growth is a gain of 150K jobs. Mauldin actually cites 166K jobs. Who knows where they get these numbers? Economists observing the change in demographics (including those at the Fed) cite the needed monthly gain at 125K jobs or so. Some estimates are as low as 110,000. If the economy is experiencing a planned slowing, a monthly growth somewhat lower is to be expected.
- Household Survey. The household survey looks at people rather than businesses. It captures those who are working as consultants and new small businesses. Those bearish on the economy (wrongly) dismissed this information during the multi-year expansion of employment. The survey has a 90% confidence interval of +/- 400K jobs. John Mauldin embraced this reading in his regular commentary. This month it showed a big decline. Last month it showed a big increase. Why comment on this only in the month when it supports one’s viewpoint?
Our conclusion, looking objectively at all of the data, is that employment is growing, but the pace is lower than past years. We do not have a political agenda. The results are consistent with the "soft landing" scenario that bearish pundits (now 20% losers on the S&P 500) told you was impossible.
Investors must either develop the skill to interpret data for themselves, or they must find the right sources.