The BLS today reported a seasonally adjusted (SA) gain of 195,000 in June nonfarm payrolls, beating the consensus estimates of around 165,000 from surveys of economists by mainstream media organizations. I had reported in last week’s Treasury update that the trend of withholding taxes suggested that the number would beat. Once again that indicator accurately foreshadowed relative strength in job growth.
The stock market’s initial reaction was mixed as some fear the approach of The Taper, but by mid session stocks were higher. The news reinforced the bond market’s trend of a growing catastrophe. Gold was getting crushed again because that’s just what The Them do these days.
Now at 20 months, the trend of straight line jobs growth should make forecasting easy but most economists with their fancy econometric models still get it wrong. This time they were too pessimistic, a familiar pattern for the past year. Meanwhile, the Fed’s efforts to stimulate faster job growth by printing money have been futile. However, the Fed will use steady job growth as an excuse to begin cutting back on QE. The real reason lies elsewhere.
There were large upward revisions in the April and May data to bring them more into line with the strength shown in the withholding tax data. That strength has continued through the end of June. Last month I wrote that the withholding tax data suggested that this month’s report would show upward revisions to the May data. Since then the withholding data has strengthened even further, so that there should again be an upward revision in the June jobs number in the next release.
Nobody cares about the revisions, however. Traders only care about this first guesstimate, which the BLS tells us has a margin of error of +/- 90,000. The market plays pin the tail on the number, which is just stupid.
The SA headline number compares with a gain of 422,000 in the actual, not seasonally adjusted number (NSA). Since this number is not seasonally finagled we must look at past years to judge whether it’s good, so-so, or lousy. Last year the June NSA gain was 343,000 and the year before 490,000. The 10 year average increase for June from 2003 to 2012 was 339,000, pulled down by an extremely weak year in 2009. Excluding 2009, the average was 397,000. This year stacks up reasonably well by all accounts.
The NSA number is not massaged to represent an idealized curve with seasonal tendencies filtered out. The actual data was again smack on the trend of the past year. Economists apparently have not mastered the arcane art of straight line trend extrapolation. The number of jobs has been growing at virtually the same rate for the past 20 months, around 1.6% per year, give or take a tenth. QE 3-4, which was announced in September 2012, with the cash flow starting in November, has not caused any increase in the growth rate. The same can’t be said for what it has done for stocks and housing prices, which have surged out of all proportion to the rate of jobs growth. The Fed’s shenanigans have sent those markets into bubbles out of all proportion to the underlying economic trends .
If we extrapolate 1.6% jobs growth against 1% population growth, we could theoretically calculate the point in time that the unemployment rate would fall to the Fed’s target of 6.5%. However, the government says that the size of the labor force rose in June and that the unemployment rate was unchanged, so there was no progress toward the Fed’s target. As long as they can massage the data that way, the unemployment rate would never reach the target and the Fed could keep jamming the Primary Dealer accounts with QE cash. There are other reasons which will probably cause them to cut back on QE.
Central banks cannot cause economic growth to track the inflation of financial asset prices. In that respect I believe that they are doomed to failure. Based on their recent trial balloons on the Taper, it seems that that message is finally beginning to sink in with the FOMC.
Note: The numbers above come from the BLS the Current Employment Statistics Survey or CES, a survey of business establishments. The BLS also does a survey of households. The household survey or CPS — Current Population Survey– sometimes tells a different story from the establishment survey. It’s also important in that it breaks out full time employment from total employment so that we can analyze that important metric separately. That story continues in Part 2 of this report which will be posted later.
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