Economists Finally Admit: We're Clueless About Jobs, Too
If you’re confused over high unemployment, you’re not alone. The people who are best supposed to understand this issue don’t have much of a clue either.
That became readily apparent following the government’s release Friday of the June jobs report, a dismal data set with virtually no redeeming factors.
More than that, though, the report blindsided Wall Street and Washington economists, who expected about 100,000 jobs created last month, not the 18,000 that showed up in the Bureau of Labor Statistics compilation.
That’s an enormous miss.
So how did it happen?
An abundance of excuses flew around from some of the economic profession’s biggest names.
Most of them, of course, blamed the government.
“We believe the BLS estimate is wrong,” the respected market research firm Trim Tabs flatly declared.
“We’ll see material upward revisions to the June data,” proclaimed Dennis Gartman, hedge fund manager and author of “The Gartman Letter.”
“There are a sizable number of additional people at work,” promised banking analyst Dick Bove, who released not one but two research notes over the weekend taking issue with the government’s report.
More somber tones, though, came from actual economists.
Jan Hatzius of Goldman Sachs released a lengthy analysis Friday evening that, while not specifically addressing the firm’s huge Friday miss—it projected 125,000 new jobs—confessed that one of its primary models may no longer be useful in predicting economic trends.
The upshot from Goldman’s chief economist: “The impact of financial conditions is only one input into the growth forecast, and other factors—the recent labor market data, the risk of fiscal restraint, and the renewed increase in oil prices—unfortunately look less supportive. We still expect a pickup in growth in 2011H2, but the downside risks to this view have increased.”
Perhaps no one in the economics community was more effusive than Deutsche Bank’s Joe LaVorgna, who had upped his forecast to 175,000 jobs after ADP last Wednesday said the private sector had created a startling 157,000 positions.
But after Friday’s news, LaVorgna declared a “labor lemon” and said prospects had worsened for a robust recovery.
“It is too early to throw in the towel on an expected second half recovery, but there is no doubt that a much improved labor market goes hand in hand with stronger growth,” he wrote Friday.
Asked Monday about the wide miss in jobs expectations, LaVorgna replied in an e-mail: “ADP, claims, and the employment components of the ISM surveys all pointed to a stronger number. Either the June data were an outlier, or the other series will weaken over the next month or so, confirming what we saw in June.”
Michael Widner, a vice president who specializes in equity research for housing- and jobs-related issues at Stifel Nicolaus, said the BLS report showing 18,000 nonfarm jobs created and ADP’s count of 157,000 are statistically insignificant in difference as both surveys carry a “confidence interval” of plus or minus 100,000. That means either figure could be that much off in either direction. Ouch.
Indeed, somebody’s wrong here.
Bove—not an economist—said incorrect seasonal adjustments in the data helped make the report gloomier than reality suggests.
Credit Suisse’s Neal Soss—who is an economist—rejected that line of thinking, saying that the June data this year was based on a five-week cycle while the report was on a four-week cycle in June 2010. That suggests that seasonal adjustments actually should have been favorable to the Friday report.
“Seasonal adjustment in June for five-week intervals tends to be more restrictive than for four-week intervals,” Soss wrote in a note. “In fact, when compared to similar experiences of seasonal adjustment for five-year intervals between May and June, this year’s adjustment is relatively favorable. Seasonal adjustment is simply not to blame for the weakness in (Friday’s) report.”
Instead, the real confusion seemed to stem from the factors LaVorgna cited—in short, an assortment of other indicators that seemed to point to a jobs acceleration.
But each carries its own weakness: The ADP report, which aside from its frequent inaccuracies, does not count government layoffs which are legion in this era of belt-tightening; while the ISM is a diffusion index, meaning it simply counts the amount of firms adding jobs against those subtracting and does not take into account job totals.
As for the weekly claims, they are weak and trending flat if not higher, suggesting there’s little reason to believe the jobs picture is getting any better.
Noted economic bear David Rosenberg of Gluskin Sheff, after citing a “dirty dozen” reasons why the jobs outlook is gloomy, tried to put a whimsical if somewhat sarcastic happy face on the jobs picture.
“Go and enjoy the weekend,” he advised. “And for the 90.8% of the workforce that is gainfully employed, be thankful you have a job.”
Alas, even that is too rosy.
According to the government’s numbers, the 9.2 percent unemployment level measures only those without a job who are looking for employment.
The more encompassing “U-6” number which factors in discouraged potential workers, jumped to 16.2 percent for the month
That means just 83.8 percent of gainfully employed workers—more or less, depending on whom you believe.
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