Test Your Skill: Interpreting Economic Commentary

How good are you at interpreting economic commentary?  What if the statement is strictly factual?  Can you tell fact from fiction?  If not, you are poised to lose money to those in the know.

Interpreting Job Growth

The non-farm payroll report is one of the most important economic releases, with massive swings in both stocks and bonds in the balance.  Crucial to the interpretation is the following question:

What is a good number?

A "good number" might be one that sustained an acceptable rate of unemployment, perhaps the current rate.  One might expect this to be a factual matter, upon which everyone can agree.

That assumption would be incorrect.  In fact, there is controversy on this topic, with a significant disparity among the leading pundits.  This is important because it influences everyone’s thinking about the general strength of the economy and the consumer.

If you do not get this right — either way — you may be making poor investment decisions.  Here are four different sources on the topic of what rate of job growth is needed to sustain the economy.

See if you can figure out which source is most reliable.  We recommend to readers our LINQCRED method to make sure that you do not miss any information.  Please do not click on the links until you have finished the test.

Source A

The number of people in the US keep growing: 300 million, with a
very high birth rate for an industrialized country, lots of legal and
illegal immigration. If  the population grows near 1%, that’s 3 million
new people in the USA each year. Almost two thirds are working folk —
immigrants and recent grads. (grads coming into the labor force are
equal to a percentage of newborns)

Do the math, and you find that the economy needs about ~150,000 new jobs merely to keep
up with this population growth.

Whenever you hear someone on TV describing 110,000 new jobs as
"robust, you know you are watching someone who is either a) innumeric;
2) an idiot; iii) a liar; IV) some or all of the above. 

Source B

And once again, The Street and their fin media
stooges bray about how bullish 132,000 NFP jobs are (CSFB’s chief
economist called the report ‘excellent.’) even though just a few years
ago Street Conventional Wisdom held that the economy must generate
about 175,000 jobs each month just to absorb demographic growth.

Lehman’s economist said, “The labor market is one of the
stronger parts of the economy right now.” This is a Clintonesque,
qualified statement. It could imply that the rest of the economy really
sucks.

Source C

[interpreting the average job growth over the last few months] …(S)ince the increase in the labor force is closer to 120k  per month this 73k average private jobs for the last 3 months represents a relatively weak job creation.

Source D

[after discussing factors affecting the retirement of "baby boomers" and how this affects those wanting jobs]  If the labor force participation rate remains at its current level,
then what might be thought of as the “equilibrium” growth rate of
payroll employment–that is, the increase consistent with a stable
unemployment rate–would be about 140,000 per month.  However, if the
labor force participation rate instead declines 0.2 percentage point
over the next year, as suggested by the Fed’s staff research, then the
comparable equilibrium payroll employment growth would be closer to
110,000 per month.

Solution

We hope that the wise audience of "A Dash" could figure this out without LINQCRED, but the discipline of a method often forces one to think.

Source A is Barry Ritholtz.  Barry has made a simple calculation without taking any account of changes in the labor force.  We want to be completely clear:  We are long-time and big-time fans of what Barry does.  Like everyone else, we read his blog daily.  We urge Barry to take note of an important demographic fact:  BABY BOOMERS.  The first one recently applied for social security.  Their retirement patterns dramatically affect the labor force.  If The Big Picture is to remain relevant on the analysis of employment trends, it needs to include dynamic analysis of the labor market, not just averages of past values.

Source B is Bill King of Ramsey King Securities.  We do not know what credentials he has, except that he writes a private market letter that  gets a lot of publicity.

Source C is Nouriel Roubini, an economist at NYU and a frequent source of bearish analysts.

Source D is Susan Bies, who was a Fed Governor at the time of the quotation.

Conclusion

Readers are free to form their own conclusions, but our money is on Roubini and Bies.  Despite this, you can expect next month’s commentary to use 150,000 jobs as a benchmark, fostering the notion that anything else is weak.  We have a long list of those who use this (mistaken) value, and we add to it daily.

We are pursuing on ongoing theme that inaccurate information and analysis is rife on the Internet.  It is very difficult to correct.  Internet pundits can say anything they want, and there is no check.  Those who act as the "gatekeepers" of the Internet frequently do not give the same visibility to refutation as they give to the original assertions.  This is an important difference between mainstream media and the blogosphere.

Other examples of non-farm payroll employment errors can be found here.