How Good Was NFP Really?

Whoever wrote the headline for today’s WSJ is our latest nominee for Peyote spokesman of the month. I don’t know gets the blame for this Saturday morning front page headline:  Strong Jobs Data Signal Economy Is Gaining Steam — but someone needs a schoolin’.

"Employers outside agriculture added 132,000 people to
their payrolls in June, and tallies for the previous two months were
revised upward, the Labor Department said Friday. Unemployment remained
a low 4.5%.

The report suggests the economy is healthy enough to
further diminish the chances that the Federal Reserve will cut interest
rates in the next few months, and investors Friday pared back those
odds. At the same time, the report cast doubt on the possibility that
the job market is so tight it is fueling inflationary wage gains.

In short, the U.S. economy seems to be enjoying a
Goldilocks moment — not too hot, not too cold — after a few quarters
of subpar growth and a few flickers of uncomfortably high inflation
that conjured images of the 1970s."

Meanwhile, other MSM were a tad more circumspect. The Times noted "Jobs Report Finds Growth Still Moderate" noting the warts:

"The job market looked much like the economy as a whole last month: subdued but strong enough . . . Amid
its signs of strength, however, the job market showed several pockets
of weakness. Hiring, for example, was concentrated in just a handful of
sectors . . .

But there are questions about whether the Labor Department’s numbers
are capturing the full employment picture. Many economists have been
puzzled at how strong some of the numbers are despite the clear signs
of an economic slowdown. Construction employment, for example, has not
registered the types of declines that would be expected during a
housing recession. (Last month, it grew by 12,000.) And some sectors,
like health care and hospitality, seem unusually strong."

CNN/Money was also somewhat circumspect:

"The report seemed to contain some contradictions about the job market and various sectors of the economy.

Retailers trimmed 24,000 jobs, for example, despite generally strong June sales reported by major store chains. And there was a gain of 12,000 jobs in construction despite the weakness in the home building market as non-residential construction payrolls grew, while employment in residential construction was flat.

But not everyone was so sure Friday’s report means the job market is immune to the weak housing market."

Away from the MSM, the Econocator had a good round up of all the NFP commentary: The fishy payrolls report.

I have a number of issues with the NFP report, all of which we have thoroughly thrashed in these pages: Thew abnormally high Birth/Death adjustment (about a rthird of the monthly net gains); the lack of wage pressure, despite full capacity utilization; the ongoing gains in Construction.

Let’s take another look at the lack of Wage pressure. Consider the following chart from EPI:  It actually shows nominal wage gains decelerating as Unemployment rate falls.


Chart courtesy of EPI


Weak job growth, anemic wage gains, and sub-par performance compared with other regions –even Europe — that’s, according to today’s WSJ, Goldilocks? I have to go back and reread then fable, as perhaps my memory is less sharp than I realize . . .

Strong Jobs Data Signal Economy Is Gaining Steam
Fed Is Wary of Inflation Despite Wage Restraint; A ‘Goldilocks’ Moment
WSJ, July 7, 2007

Jobs Report Finds Growth Still Moderate
NYT, July 7, 2007

Job growth tops forecasts
Chris Isidore, July 6 2007: 10:15 AM EDT

Moderate top-line growth masks underlying weakness
Jared Bernstein
EPI, July 6, 2007

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What's been said:

Discussions found on the web:
  1. Werner Merthens commented on Jul 7

    The WSJ article raises a series of interesting questions?

    1. What is the root cause of inflation?

    2. Is it demand for higher wages by workers?

    3. Is it rising commodity prices?

    4. Is it the fiat money?

    5. Are spendthrift politicians involved in the process?

  2. Grodge commented on Jul 7

    Referring back to the grain commodities post, isn’t the sharp rise in grain leading to higher corn plantings?

    This should bring down the price of (at least) corn. What other commodities will be affected by more corn plantings?

    My guess is that petroleum stocks will decrease in order to harvest and process it.

  3. JWC commented on Jul 7

    RE jobs in the housing industry, we just recently bought a new home and sold our old one. (Lucky, we managed to pull it off and the deal on the new one easily compensated for the hit we took on selling).

    Anyway, Pulte was our builder. Got to know the project manager and when he was over doing the final walkthrough, they have layed off quite a few people. Last fall when we signed the contract they had a great deal for the first 30 buyers in the new development. It is July – and they still haven’t hit that number.

    This is the midwest, and the housing situation has not been as bad in our area. But I just don’t believe that there has been growth in the building trades, per the employment report.

  4. gw commented on Jul 7

    “What’s throwing investors off this time, he says, is the Bureau of Labor Statistics payroll survey. The latest report said 157,000 jobs were created in May, double the level a month earlier. But the BLS itself admits a key component of this statistic–estimates of jobs added at small businesses just opened minus jobs lost at small ones just closed–tends to exaggerate employment in a slowdown. Hoisington notes the estimate accounted for 58% of purported job growth in the past year.

    He says jobs creation today may be closer to the figures from another monthly bls report, the so-called household survey based on phone calls to homes rather than businesses. This says companies added only 15,000 jobs in the year through May, versus the payroll’s 665,000.”

  5. Woodshedder commented on Jul 7

    The problem with trying to make sense of the data is one of induction. There is no rational way of proving that a pattern will continue into the future just because it existed in the past.

    There can exist much conjecture on the NFP and what it means for the economy. However, if one applies a Popperian falsification test to the theory that the NFP is wrong, and by extension the economy is not healthy, what are we left with? Is it possible to falsify these ideas? If it is not possible to falsify them, then they are not truly scientific, and are simply the conjecture and narrative fallacies of macro-economists.

    I challenge the readers to find evidence to falsify the theory that the NFP is wrong, and by extension, disprove the goldilocks economy. It is simply not enough to point to the past and say that because x happend, then y must happen.

    We simply do not know what we do not know.

  6. Joe Klein’s conscience commented on Jul 7

    I always said, if the president is willing to lie to get us into a war, what else is his government willing to lie about?

  7. Karl Smith commented on Jul 7


    There is very little variation in that data. What little there is shows an inverse correlation between unemployment and wage growth.

    That is, there are only two values for unemployment 4.7 and 4.5. The values for earnings growth are the same across unemployment rates accept for the two extreme values. The extreme low value occurs at 4.7 and the extreme high value occurs at 4.5.

    More importantly, however, there is not a direct theoretical connection between job growth and wages. There is some connection with unemployment buts its not that strong.

    You wouldn’t expect to see rising wages at 20% unemployment or falling wages at 2% unemployment but in between it is hard to say.

    Changes in the size and compisiton of the labor force can easily dwarf general availability of labor.

  8. Winston Munn commented on Jul 7

    As to the question above about the causes of inflation, it might be interesting to note this from the March 2007 ISM:

    Commodities Up in Price
    Aluminum (4); Cobalt; Cobalt Powder; Copper; Corn; Corrugated Containers; Diesel Fuel; Fuel; Natural Gas (2); Nickel (5); Plastic Resins; Stainless Steel (3); and Steel.

    Commodities Down in Price
    No commodities are reported down in price.

    Commodities in Short Supply
    No commodities are reported in short supply.”

    Traditional thinking is that it is either an increase in demand which pressures supply or a dwindling supply with no reduction in demand that causes inflation

    If that is so, why are commodity prices rising with no shortness in supply?

  9. spongetoddsquarepants commented on Jul 7

    “…. Statistics were just as much a fantasy in their original version as in the rectified version. A great deal of time you were expected to make them up out of your head. For example, the Ministry of Plenty’s forecast had estimated the output of boots for the quarter at a hundred and forty-five million pairs. The actual output was given as sixty-two millions. Winston however, in re-writing the forecast, marked the figure down to fifty-seven millions, so as to allow the usual claim that the quota had been over-fulfilled. In any case, sixty-two millions was no more the truth than fifty-seven millions, or than a hundred and forty-five millions. Very likely no boots had been produced at all. Likelier still, nobody knew how many boots had been produced, much less cared. All one knew was that every quarter astronomical numbers of boots were produced on paper while perhaps half the population of Oceania went barefoot. And so it was with every class of recorded fact, great or small. Everything faded away into a shadow-world in which, finally, even the date of the year had become uncertain….”

  10. Bob from Brooklyn commented on Jul 7

    When you can’t tell the difference between government, media, business (and it’s all under a war banner), that basically signifies fascism…

  11. Jim commented on Jul 7

    I think in the WSJ story, Goldilocks gets eaten by the bear!! :)

    What the WSL writer appears to not understand is that UE is usually very LOW just prior to a recession. It’s a LAGGING indicator and is usually at it’s lowest peak at the beginning of a recession.

    Maybe the unemployment stats are wrong for every reason stated in BP, but it is a moot point. Businesses start losing money …THEN they start laying off people.

    Another point that no one seems to notice is that 2 out of the last 3 recessions came immediately after the Case-Shiller composite housing index peaked at 125 in 1980 and 1990 and then started to decline. We peaked at 185 this time and are dropping!

    These kinds of observations don’t make for good cheer leading though, so not many rags are going to dwell on them.

  12. Run Paul commented on Jul 7

    SBSP’s delicious ‘1984’ quote was *spot on*.
    Our’s is a hyper-managed socialist economy.
    Wait until you see Fed spin pre-October ’07,
    on the 20th anniversary of Great 1987 Crash.

    They’ll be ’07 cars piled up at the dealers,
    and used cars in every available parking lot,
    For Sale signs on every single suburb block,
    with piles of evicted furniture on the curb.

    And Kijiji will be full of kidney donors….

  13. TexasHippie commented on Jul 7

    Woodshedder, that’s an interesting challenge! But while the bears say this number is weak, the bulls are saying it’s strong. If the predictive capability of NFP numbers is not falsifiable then we need to beware of its use in bolstering arguments which are most widely and vociferously distributed. Right now the bulls have the pulpit, and bubbles build when misinformation is widely believed.

    Doubt is a great thing, and I appreciate those such as Fred who bring a healthy dose of it here – even when they are wrong :)

  14. Eclectic commented on Jul 7

    After long and deliberate thought applied to the NFP reports from BLS, I’ve come to the conclusion that the great focus on NFP is probably more-or-less meaningless.

    I don’t doubt the accuracy of BLS… or of ADP… or of the BED component of BLS, nor of the veracity of any of those.

    But, here’s the scoop.

    BLS’s NFP and the ADP both only have one chance of providing a significant early warning of an employment turndown, and that’s if there were suddenly to be a change of, say, greater than about a 460k job reduction (m-o-m) in a given month.

    Too, such an event might likely coincide with immediate economic weakness clearly and noteably indicated otherwise (for example: with terrorism, an unequivocal financial crisis, or some econometric absolutely dropping off a cliff), that the NFP would then later only be needed for confirming.

    I give the nod for accuracy to the BED report that won’t come out again until August, but it’s always reported, structurally, approximately 8 months behind the data.

    You can go here:

    …and you’ll see that BED will NOT net the figures for you between job creation and job destruction (it would be so easy for them to accomodate such a request). While I can’t know for sure, I suspect that BLS does this purposefully, because the release of any net calculation for a past period that is so diametrically opposite to the monthly reports for that same period (as were the observations of last year’s 3rd quarter) may represent something of a, at least structural, conflict of interest between these two metrics.

    Consequently, BED might only therefore give us a clue as to if the underlying delta of the NFP report is about to begin discounting its internal momentum indicators that affect it’s exponential smoothing variables.

    Said another way: Unless and until NFP senses a changing momentum, that momentum itself is likely to continue to distort the forecasting variables themselves that are involved in producing the monthly NFP reports.

    Greg Ip’s article quoted somewhere above is written according to the suspicions that some may have regarding NFP’s current capacity to demonstrate weakening employment, and I’ve just explained technically why they may have those suspicions.

  15. Eclectic commented on Jul 7

    I apologize for referencing Greg Ip’s piece and not being able to link it. I can’t find it now… can someone please?

    I have to go conduct a family reunion. I’ll be back late tonight if I survive the food.

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