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

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.


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.


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.

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  • muckdog November 5, 2007  

    I recognized BR, but not the rest! I agree with your conclusions, although I figure anything around 150K is getting the job done. A little plus or a little minus is no big deal. It’s when we get the gonzo growth numbers or dramatic no-growth numbers when we have to worry.
    Closeness only counts in horseshoes, hand grenades, and payroll numbers…

  • Jeff November 5, 2007  

    Muckdog –
    Congratulations on spotting even one quote. It is one more than nearly all readers will get!
    Meanwhile, the difference between 110K and 150K is quite important. You can have confidence that I would not bring it up otherwise.
    I think that unemployment is going to drift toward 5%, the accepted non-inflationary rate (NAIRU) so we are going to see some lower growth numbers.
    I suppose that many investors will see this as additional recession confirmation, but maybe we can help a few readers.
    Thanks for participating!

  • jimmy5 November 5, 2007  

    C’mon, nobody believes this statement, “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.”
    You relentlessly knock on this guy making him look like a buffoon on a daily basis.

  • Jeff November 5, 2007  

    Jimmy5 –
    Disagreeing with the conclusions of others can be done in various ways. I try to engage constructively and with evidence. Barry often visits here with comments and always replies in a constructive fashion. This is very rare and noteworthy.
    Barry makes multiple posts every day, taking positions on many issues. I pick issues quite selectively. Each article takes hours to prepare and write, after my trading is done. Everything is part of an overall plan to help investors. I agree with many of his observations and conclusions. Despite this, much of my current writing agenda (more coming soon) includes items where I disagree with his conclusions.
    Most people do not take issue with Barry. It is a bit like David and Goliath. None of us are very important in influence next to him. Many of the gatekeepers who highlight articles do not feature anything that engages Barry. This is a very unfortunate feature of the current investment blogosphere. Constructive engagement should be encouraged. Since I am not trying to monetize traffic, I do not care very much, but others may be more concerned.
    Barry has been a good sport about most of our humor posts. He has frequently offered email advice on blogging issues when I have requested it. He also accepts trackbacks on his articles, and encourages adverse commentary on his site.
    The reality is that Barry’s work sets the table for much of what investors think about. My hope is to change some of his views on key issues, like the one highlighted today. It is true that we have not yet won much respect from Barry, but the hope continues.
    Thanks very much for making this comment. Your views probably reflect those of others, so I appreciate the opportunity to clarify.

  • Jim November 6, 2007  

    Jeff –
    Your work is head & shoulders above TBP. Of course, that’s just my opinion. But I find much more insight and positive guidance from “A Dash” than any other blog. You stay “on subject” much more than most others.
    (If I want a music review, I’ll go to a music blog).
    Keep up the great work. And thanks.

  • Barry Ritholtz November 6, 2007  

    I find it kinda funny that I am now thought of as an influencer, when what I have long attempted to do was push back against the “common wisdom,” lazy reporting, and Wall Street spin.
    I used to “fight the man” and now according to Jeff, “I am the man.” I find it amusingly ironic.
    The point of my back of the envelope calculations was to show that what should be perceived as an adequate or mediocre data point is being cheerleaded as something more.
    As to the labor force participation rate, note that its slipped not because of retiring boomers but due to a significant decrease in women 25-39 in the labor force.
    We can split hairs as to whether its 140 or 150k is mere population growth. We can debate whether or not in the coming years that number will slide as the boomers retire.
    But the bottom line is that what many are celebrating as wonderful numbers (Great quarter, guys!) is merely adequate.

  • Not Barry Ritholtz November 6, 2007  

    A story of two reactions:
    1. Good economic news released!
    [Barry]The numbers are fabricated. The administration is cooking the books![/Barry]
    2. Bad economic news released!
    [Barry]The numbers are terrible. See? I told you so![/Barry]
    Heads he wins, tails he wins.

  • SteveGee November 6, 2007  

    I read both of you, and find both of you interesting and useful when trying to find my way around the crazy world of trading.
    – In terms of who do I prefer? well it depends on my ‘selective bias’ at the time. Sometimes, I find Jeff’s ‘words of wisdom’ suit my position, on other occasions, I’ll go with Barry’s rather more colourful views. – The truth is I feel that between you, you both provide some excellant comment and views. — Of course I’m still waiting for the day when both of you have the same view. – I suspect though, that it may be rather chilly in Hades come that day.

  • Mike November 6, 2007  

    That you’ve become “the man” is a sign of success! You wouldn’t be the first who started a venture with an idea solely because he was interested in it and then had it grow seemingly by itself but in truth as a result of a lot of work.
    While I disagree with some of what’s posted on TBP (and quite a bit with many of those who respond, as they tend to be a bit temperamental for my taste), in my opinion it sure is a nice change from the typical news “reporting”. One might currently qualify it as “alternative” reporting. However, to me it looks more like groundbreaking. It’s how younger generations are getting their news. This is key, imo, to a less watered-down version of the news, which we often get from television and newspapers.

  • Barry Ritholtz November 6, 2007  

    I do never bought into the conspiracy theories — if the White House couldn’t keep the firing of 6 attorneys a secret, do you really think they could cook the economic books and get away with it?
    Besides, ALL of the numbers are transparently posted on the BLS/Commerce web site.
    I disagree with much of the modeling (i.e., B/D adj, core inflation, GDP Deflator) — but the data is all there for those of you who want to wade in and play . . .

  • Jeff Miller November 6, 2007  

    Barry – If this was a matter of splitting hairs, I would not raise the issue. There is a significant difference between the 150K that you use and Roubini’s 120K. It all adds up in exaggerating a picture of economic weakness.
    I don’t mind a back of the envelope calculation when there is no good alternative, but here there is plenty of evidence that you are incorrect. You could be a leader in getting some of these other guys to become more accurate.
    People who do imply conspiracies — like Abelson — cite you to get started and then call it “fudging” the data.
    Another question is why you want to take on those building the models. You are skilled at many things, but your experience seems to be as a critic of models, not a builder of them.
    Thanks again for your comments and a willingness to engage in discussion that is sadly not shared by many.

  • Bill aka NO DooDahs! November 6, 2007  

    150K is 25% higher than 120K, it seems like that would be a significant difference to the non-innumerate.

  • Tim November 7, 2007  

    30K into 150 million jobs is .02%, 1/4 of 1% annualized. To me it looks like splitting hairs. Note: I have no idea how many jobs there are in the U.S. To make the difference significant in my investing plans would not help. The fact that the market can make the swings it makes on these numbers is the most interesting part. As with my investing philososhy (such as it is!) 1 year and 3 year type trends have more use. A $20 trillion economy is not going to change direction on a few months data. Only a few economists egos!

  • Bill aka NO DooDahs! November 7, 2007  

    Remember how big a deal the various blowhards in the econ media made over “rounding down” or “rounding up” an unemployment figure? Imagine how giddy they would be over a trend that would raise the UE rate from 4.7 to 5.0 in a year!
    Dittos, I’m not one who uses this to trade, other than very rare targets of opportunity …

  • muckdog November 7, 2007  

    The trend in a jobs numbers “moving average” is important too, right? Throw out some of the outliers.
    The Four Horsemen of the Blogosphere I read are Barry, Jeff, Adam Warner and the Day Shark. (There are others that I link to from my blog, too. But naming them here would wreck my Revelation metaphor.)
    FSLR is up over 20% ah on their earnings. The Sun creates energy no matter what the jobs numbers are…

  • Bill aka NO DooDahs! November 7, 2007  

    Which one is “pestilence?” Should I guess?
    I’ve got probably 50 or more on RSS, but there are some I just check to see what needs debunking today …

  • Blackvegetable November 10, 2007  

    “Malpass has been very accurate for several years, during a time when the economy has not been easy to predict.”
    David Malpass should be prosecuted for fraud….
    Exhibit A:
    “Indeed. The durability and sturdiness of the current economic expansion have been systematically underestimated due to a fixation on consumption, interest-rate hikes (rather than the level of target interest rates), house prices, the fiscal and trade deficits, and comparisons to previous and very different expansions.
    Unlike other expansions, this one was built on the dollar’s value moving out of deflationary strength and into reflation. It has therefore been an unusually steady and strong expansion — one buoyed by the 2003 tax cuts which were both well-timed and well-focused.”
    February 10, 2006, 7:51 a.m.
    An Expansion with Staying Power
    In the abovellinked piece, Malpass takes on “conventional wisdom” and illustrates how a combination of faith in economic esoterica, and a distinct political bias contribute to generate absolute, unvarnished tripe. Imagine how well served his reading audience, his employer and its clients might have been served if he has simply heeded what the combination of low nominal job growth, stagnant real wages, negative savings rates, and irresponsible fiscal policy was telling us about the state of the US economy……
    It is so grossly irresponsible one is left to ask if it was deliberate….