On Jobs, Economists From Mars, Investors From Venus
If ever there were proof that economists are from Mars and investors are from Venus, look no further than the upbeat commentary from forecasters over the weekend to the Friday job’s report.
Several leading economists reviewed the jobs data in-depth and either yawned or took the exact opposite view from the market’s 204-point thumbsdown.
“With the exception of a smaller-than-expected increase in private payroll employment, last week's economic data were robust and reinforced our expectation that GDP will grow at a solid pace near 4 percent in the second quarter,’’ wrote Macroeconomic Advisers.
Although it believes European financial turmoil increases the downside risks to its upbeat forecast, it said gains in the work week and average hourly earnings support its outlook and suggested there is upside risk to its view on employment compensation. More money on hand for consumers could mean more spending and better growth overall.
Other economists stressed it was wrong to view the May report in isolation. The three-month average for payroll gains only fell to 139,000 from 146,000. The three-month average for the separate household survey declined to 259,000 from 374,000. That’s much lower, but still pretty robust.
And there’s an interesting debate about whether seasonal adjustments to the data could be causing the government to understate job growth. The government adjusts the data every month to account for seasonal variations in the workforce. This is the data that the market follows and is the source of the much-maligned 41,000 job growth number for the private sector.
The adjustment process essentially wipes out the changes that come with warmer weather when construction workers are hired, and smooths out the volatility from the hiring and firing of teachers that bookend the summer.
But Harvard professor Quinn Mills, who was was involved in the 1960s in helping the Bureau of Labor Statistics (BLS) create seasonal adjustments, wonders if the seasonals may be failing now because these are anything but normal times. His concern is that the seasonals look for normal swings at a time when the nation is in a cyclical upswing from the depths of the depression. Jobs, he suggests, are being created quite apart from seasonal variations.
On the face of it, he has a point. The not-seasonally adjusted data showed gains of 711,000 private sector jobs in May compared with April. That compares with the 41,000 private sector jobs reported for the seasonally-adjusted series. In other words, the BLS seasonal adjustment deemed 670,000 of the jobs created to be normal seasonal variations.
Intrigued by Mills’ idea, CNBC asked Mark Zandi from Moodys Analytics to look at the seasonal data. He crunched the 2010 data using seasonal adjustments from 2007 and 2008, years that weren’t affected by the steep job cuts from 2009 recession.
“The bottom line derived from this quick-and-dirty look at the data is that seasonal adjustment appears to be reducing the measured employment gain since the beginning of the year in both the payroll and household surveys, but only very modestly,” he said.
Zandi found that the seasonal adjustments could have understated job growth by as much as 190,000 jobs in April and 90,000 in May. Note that his work also showed that seasonals overstated job growth by 159,000 total from December through March.
“I think it is reasonable to think that the severity of the recession is causing trouble with the current seasonals,” Zandi said.
This is preliminary work and more number crunching is clearly in order here. Not that investors will find any solace in this, but Zandi says any problems with the seasonals will work themselves out by the third quarter.
There are some interesting lessons to be learned here. Some will charge that bullish economists are simply changing the metric when the data doesn’t tell the story they want. But it’s worth noting that economists always argue it’s wrong to draw too many conclusions from a single month’s number, especially one that is traditionally revised so heavily.
The private-sector jobs did continue their five-month string of positive growth in May, anyway you look at it. It’s also worth noting that even Goldman Sachs , which is expecting a second half slowdown, said investors should be cautious in overinterpreting the jobs report.
Goldman's view is that it is better to view April and May as a two-month average of 122,000. Goldman economists say, "The key lesson is not that employment growth is once again slowing, but that its speed has so far failed to surpass the trend inflow into the labor force." In other words, if it doesn't pick up from here, it will be hard for growth to stay above trend.
Secondly, what’s instructive here is the lack of confidence among investors in the recovery. Many only grudgingly bought into the rally and the economic upswing when confronted with overwhelming evidence. That they sold on the first whiff of weakness speaks volumes about their skittishness and skepticism.
Finally, the weak job report helped solve part of the economic puzzle by explaining why jobless claims remain so high and the ADP employment report was so muted. But for others, all it did was leave unanswered the issue of why other data has been so strong.
Faced with a choice between the two, investors have chosen the pessimistic interpretation. Many economists have chosen the optimistic one, but, of course, that’s because they are from Mars.