In today’s BLS jobs report, Nonfarm Payrolls came out at a gain of just 75,000. That’s on a seasonally adjusted month to month basis. The surveys of economists had predicted a gain of 180,000.
Oops. Big miss. Traders loved it. They bought stocks AND bonds hand over fist. Clearly they believed that the news supported the Wall Street narrative that the US economy is weakening. That means that the Fed must cut rates. And it will cut multiple times, the current story goes.
Liquidity moves markets!Follow the money. Find the profits!
And that is bullish! The US economy is collapsing. HOORAY! Buy stocks!
Or so the story goes. But the media reporting on the BLS jobs report on nonfarm payrolls left out a few facts. So as always, we’ll consider the facts.
Can’t See Reason for Hullabaloo from the Jobs Chart
First, we’ll look at actual, not seasonally adjusted data. We’ll have none of this seasonal adjustment hocus pocus that often results in massive revisions the next month! And the month after that. And for 5 years after that.
No, we prefer to stick with what actually happened. We can tell if it’s good, bad or indifferent by simply looking at a chart. The eyes don’t lie.
We then also compare the growth rate for the current month versus the same month in recent past years. We also consider whether the annual growth rate is increasing, declining, or stable.
Then we can clearly see if May was as bad as they say.
Do you see what I see? The red line is the level in May each year, including the May just ended. It’s almost a straight line trend! Where’s the big drop? The May trend isn’t appreciably different than the railroad tracks trend of the yearly high in November and the yearly low in July! Why all the hullabaleffingoo?
Now look at the annual rate of change at the bottom of the chart. Sure it has declined since January, but it’s still in the same range that it has been in for 8 years. It’s still above the low growth rates reached in late 2017 and early 2018.
Jobs Report Nonfarm Payrolls Didn’t Look Great On the Surface
Now here’s the hard data. The actual number of jobs based on the unmanipulated survey was 151,629,000. That was an increase of 687,000 jobs from April. May always has a gain, so we have to compare it to the typical May. In that respect it was weaker than the average May gain of 809,000 over the past 10 years. But it wasn’t the worst May. May 2016 was significantly weaker and May 2011 was about the same.
So the actual unmanipulated numbers did not look great. The annual growth rate of +1.5% was the lowest since January 2018. Weak, but hey, it’s double the rate of population growth. Is that enough to justify the thinking that the economy is so weak that the Fed must cut rates?
But There Was a Catch
Yes indeed, there was a catch. Normally nobody reports the jobs total. It’s just too big a number. 151 million. Wow. The headline number of a 75,000 gain isn’t even a rounding error. How do they know that they have anything close to that degree of accuracy?
Well, they don’t. The BLS tells us that “the confidence interval for the monthly change in total nonfarm
employment from the establishment survey is on the order of plus or minus 110,000.”
That means that the change in May could have been +185,000. Or it could have even been negative.
I think that the latter is more likely. The BLS is more likely to have underestimated the actual change. The Excise Tax data suggested a pretty strong economy in May. And a SWAG of the payrolls data from May Federal Withholding Tax collections also suggested that May should have shown a pretty strong jobs gain.
Well, that analysis was wrong.
Or was it? The tax data is real. The BLS jobs report on nonfarm payrolls is statistically manipulated.
In addition to the sampling range of error, there’s the issue of what’s called the “birth-death” adjustment for new business formations and failures. They handle that by ignoring business failures. The BLS says, “This is incorporated into the sample-based estimation procedure by simply not reflecting sample units going out of business, but imputing to them the same employment trend as the other firms in the sample.”
That results in an automatic undercount when more businesses are formed, or businesses with more employees are formed, than those that went out of business. In other words, when business is good, jobs tend to be undercounted. And the tax data says that, right now, business is good.
Finally, the BLS tells us that it benchmarks the data once a year after the fact based on actual job counts derived from the actual records of the unemployment insurance program. It says that “Over the past decade, absolute benchmark revisions for total nonfarm employment have averaged 0.3 percent, with a range from -0.7 percent to 0.6 percent.”
So, when it comes to the May jobs report of nonfarm payrolls, my money is on the tax data. The June and July jobs reports will revise May nonfarm employment upward. And the benchmark revision next year will revise the number up again.
For investors with a long term horizon, that matters. It matters because it suggests that the current belief that the economy is weakening, and that that’s bullish, is false.
But for traders that doesn’t matter. What matters in the short run is that, rightly or wrongly, the market believes that the economy is weak and that the Fed will cut interest rates. The second guessing is coming, but it must await subsequent economic reports.
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