Waiting for a FUGLY Employment Situation Report

Bob Farrell, Merrill Lynch’s now retired dean of Market Strategy, used to say “News doesn’t drive the markets, markets drive the news.”

That’s worth keeping in mind in light of the recent slew of bad news: Bleak forecasts from Cisco (CSCO) and General Motors (GM), slumping sales at retailers, state and municipal budget shortfalls.

Then, there is the mother of all economic indicators, today’s Non-Farm Payroll report. Bloomberg notes that BLS “will probably report that the jobless rate climbed to a five-year high of 6.3 percent in October” and that  “Payrolls shrank by 200,000 workers, the biggest decline since the start of the Iraq War in March 2003.” The Employment Situation report is released at 8:30am today.

There are a few things that you should keep in mind when that report comes out:

1) Any given report is irrelevant. However, the employment trend is very important. Are jobs being created or lost? Are recent changes accelerating?

2) The BLS headline number for Unemployment — U3 — tends to under-report the full extent of job losses; A better gauge as to the health of the labor utilization is the broader U6;

3) Watch wages & income as well as changes in the hours worked. We’ve seen a mass “stealth layoff” as companies cut people back rather than fire them. Each of these may hold clues as to  further pressure on the consumer;

4) The Birth Death adjustment continues to overstate the amount of new jobs created, especially in the finance and construction industries;

5) Reporting monthly changes in a labor market of a 140 million people with any degree of precision in real time is a difficult, thankless task, highly subject to revision.

Regardless, we should expect an acceleration in job losses for the next 6 months as the worst of the credit crisis shows up in the data.

Unfortunately, the NFP we have seen so far only reflects the mild recession we have been in since January. As the economic contraction deepens, and prolongs, NFP is only going o get worse — potentially, much worse. That’s a given. The question for investors is how much of the weakness, and coincident earnings recession, has been fully priced into the markets.


Undercounting Under-Employment (November 2008)

Rosy Jobs Rate Has Thorny Underside
RealMoney.com 2/9/2005

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