I always enjoy chatting on Twitter with Bloomberg’s Kathleen Hays (My twitter page is here). She asks great questions. In the course of a Twitter exchange last night she asked me for my forecast on nonfarm payrolls. I don’t have one. It’s a pointless exercise that no one can consistently get right for a couple of reasons. First, the margin of error in the first BLS posting for the month is plus or minus 100,000. Any guesstimate that is in a 200,000 range could ultimately prove correct once the BLS is finished adjusting the number 5 years from now. That’s how long it takes for them to reach their final estimate for this month with their methodology.
Then there’s the issue of sensitivity. This month, a 0.1% change in the year over year change in total jobs will result in a change of 132,000 jobs month to month. The consensus call is for a gain of 90,000 as reported by Bloomberg. If the year over year change is +1.4%, the gain for November would be 56,000 versus October, which the media would call a huge miss. But if the year to year gain is 1.5%, the gain for November versus October would be 188,000 which would be a huge beat. No one can consistently estimate the year to year growth rate correctly to within 0.1%.
Let’s say that ultimately 5 years from now the BLS settles on a gain of 100,000 for November. Given the initial margin of error of 100,000, any guess between no gain and a gain of 200,000 would be within the statistical margin of error, and would have been a pretty good guess. But if the number is short of the consensus forecast by forty or fifty thousand, god forbid, the market will treat it like a catastrophe. That’s just ridiculous. The revision the following month could be that much, and when the numbers are re-benchmarked in February, the change in the November number will almost certainly be more than that. Then the BLS revises the number 4 more times before it’s close to what really happened.
That being said, I told Ms. Hays that, based on very strong withholding tax collections in November, which were up 6% year to year in nominal terms and probably around 4.5% in real terms, I expected the headline number might beat consensus. The 6% gain obviously includes some non employment related withholding, but it’s such a strong number, it’s hard to ignore.
I mentioned to her my thinking that cash flow drives everything, referring to the Fed, and that with QE3 cash settlements finally under way as of November, I expected the economic numbers to accelerate in December and January. The Fed’s QE 3 purchases are forward contracts. The first purchases were in September. They did not settle until November 14-20. We could not judge the effectiveness of QE3 until now, because while the Fed may talk, the money talks louder, and the money didn’t talk until November 14.
Kathleen asked me what the mechanism was. That’s difficult to describe in 140 characters on Twitter, but my answer was that first the Fed credits Primary Dealer accounts for the MBS purchases. Then the dealers buy Treasuries along with more MBS, stocks, and whatever else they fancy, but most importantly Treasuries. The Treasury receives that money and then turns around and spends it, converting the initial financial credits created by the Fed’s MBS purchases into economic credits and economic activity.
I did not say that if it were not for the new money from the Fed, these credits would need to be deducted from some other activity. But since the Fed expanded the entire systemic balance sheet with those new MBS purchases, it was additive in terms of economic credits, not to mention asset inflation. It’s why both stock prices, commodity prices, and economic data all move when the Fed injects new cash into the system, and they stagnate when the Fed stands pat.
In part 2 of our discussion, I show the relationship between Fed pumping and stock market and economic indicators, and show the fallacy of the idea that QE 3 impact is limited because banks aren’t lending and are just sitting on reserves. The effectiveness of QE is probably diminishing, but it still has an impact. And it is emphatically not true that banks are just sitting on reserves.
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