Informational Power: Interpreting the Payroll Employment Report

What is the market impact from the interpretation of data?

It is an open and free debate, but there is a problem.  The results follow from advanced statistical methods and processes.  Even the smartest hedge fund managers, columnists, and pundits cannot draw independent conclusions.  They did not take the right classes.  They never did any time series modeling or survey research.  Briefly put, they lack the necessary skills to evaluate most data.

The result:  Nearly everyone relies upon the analysis of those accepted as experts.  What choice is there?

This is a recognized principle in social science, called the two-step flow of communications.

Application to the Monthly Payroll Employment Report

When do we know that data interpretation has a market impact?  One test might be the widespread citation of a conclusion.

Our "go to guy" for those on the NYSE floor is Art Cashin.  In his daily comment (very valuable and available to UBS customers) he wrote as follows:

Payroll Numbers – Three pros, Dennis Gartman, John Mauldin and Greg Weldon each deconstructed the non-farm payroll data. Their conclusions were that the data was, actually, anything but bullish. Things are not always what they seem at first glance.

So the perception on the floor relies on these influential interpreters of data.  What are their sources?

John Mauldin

John Mauldin does a number on the number!  Even though this is an extended excerpt, readers need to check out the entire analysis.

Without that addition from the birth/death number, total private employment
would have dropped by 296,000. Now, if that had been the headline number, the
market would have tanked. Now, I have no doubt that the economy did create a lot
of new jobs last month. But when the final revisions are in, we will see that
job losses were well south of 100,000. If memory serves me correctly, the BLS
had to add about 800,000 jobs that they missed during the recovery in 2003-4.
(The birth/death model misses job growth during recoveries, the opposite result
of the miss in slowing periods.) They did this just last year, in a major
revision of the data. We will see the same type of revisions in 2010, only this
time it will be downward.

And even the BLS says that the birth/death numbers have little statistical
meaning. The following is from their own website (courtesy of Dennis Gartman)
[emphasis obviously mine]:

“Birth/death factors are a component of the not seasonally adjusted estimate
and therefore are not directly comparable to the seasonally adjusted monthly
changes. Instead, the birth/death factor should be assessed in the context of
its effect on the not seasonally adjusted estimate… The components are not
seasonally adjusted separately because they do not have particular economic
meaning in and of themselves

Mauldin also cites Gartman and The Liscio Report.

Barry Ritholtz

Barry Ritholtz did his regular review of the employment numbers, with, as usual, a special focus on the birth/death adjustment.  The overall conclusion is that employment growth is overstated and the BLS methods are seriously flawed.

He also quotes at length from Alan Abelson, doing his monthly bearish take on the BLS report.

David Merkel

David Merkel undertakes his typical thoughtful analysis of the problem, well worth reading in the entirety.  David looks at the addition of jobs from the B/D adjustment and compares these to the net job change over time.  He graciously notes our dissent on some of the key issues.


The significance of these analyses is demonstrated by Art Cashin’s citation.  The notion that the BLS methodology is wrong has become accepted as conventional wisdom.  Nearly everyone thinks that these are "phantom jobs", added by a flawed methodology, and that "turning points" in  the market are missed.

It is not part of the job description for BLS employees to write on blogs or to appear on CNBC.  As a result, there is no spokesman for their method.  It is a one-sided debate.

All of the sources cited in this article have significant power.  Their arguments have influenced active traders to believe that economic data have been artificially inflated.

Our Approach

After many months of attempting to refute specific claims about the BLS approach, we have decided to take a different tack.  More to come….

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  • Steve May 7, 2008  

    Honestly, I don’t think a bunch of bloggers have influenced anything. I do find it amusing, however, that some bloggers can conclude that the entire market is being duped and they’re the only ones smart enough to see the truth. Whenever John Browne is on Kudlow & Co., he likes to quote the “real” inflation numbers from Shadowstats and scream about how the market is being duped. Hilarious.
    The arguments against the B/D model have been with us for years. And we’ve had many revisions to the employment figures that encompassed the periods that used the B/D model. I don’t recall there being any analysis done showing that the B/D model was inferior to the prior methodology.

  • Vermont Trader May 7, 2008  

    Even if you take the government figures at face value, the latest payroll report was still weak.
    Payroll employment is only up 0.3% year over year. This stinks and is consistant with a pre-reccessionary enviroment.
    Factory man hours were down 1.2%. The index of aggregate hours worked fell 0.4%
    These are not results that support GDP growth in the second quarter net of the effects of the government economic stimulus.

  • VennData May 7, 2008  

    So then, the “contrarian” play is that the B/D adjustment is more useful than not.
    John Williams of Shadowstats also claims that the inflation “under-reporting” is Clinton’s fault; a little economic history involving Boskin and Bush I might help him. The best thing that can be said for his site is that he improved the layout.
    And the idea that the government is lying about inflation so they don’t have to pay COLA adjustments is preposterous. The Congress is heading us toward a $750B plus y-o-y increase in the debt. They could care less about COLA adjustments.

  • Jeff Miller May 7, 2008  

    Vermont — All of the economic data have been for below-trend growth, maybe 1%. Payroll jobs can actually decline a bit and still not indicate negative GDP (due to higher productivity). That still could be an “official” NBER recession, of course.
    I would just like to see better understanding of the BLS methods.
    But your points are well taken.

  • Jeff Miller May 7, 2008  

    Venn – You are one of the few to see the inconsistency in the arguments about government policy. There is no one “government actor.” There is plenty of disagreement — between branches of government, legislative houses, within and between parties. Some would be delighted to increase benefits for old folks, a powerful voting group. As you correctly note, just look at their behavior. “Government” is not like a single-minded business manager, trying to accomplish some rational calculation.

  • Bill aka NO DooDahs! May 8, 2008  

    True enough, Jeff, but there are common motivations and themes.
    Regardless of their beholdenness (sic?) to different special interest groups, government actors are practically united in wanting to rob from the many to benefit the few – it’s just a question of “which few?”
    It also seems, from the historical evidence, that they are practically united in wishing to expand the power of government, even if they may have different, competing special-interest groups for whom they wish to use this power.