May 2008 NFP Preview

Another month in the books, and another NFP report.

Job creation has been flat to negative for the past 5 months or so. According to Bloomberg, consensus for today’s non-farm payroll is a loss of -60,000, with estimates covering a broad range from -10,000 to  -150,000. The most negative forecast was ING Financial Markets; Most positive was AIG Investments.

Although ADP reported a positive 40,000 on Wednesday, none of the economists surveyed are expecting a gain in NFP. For a while, ADP was on a roll, tracking pretty close to the BLS data. Suddenly last year, they diverged. Since then, ADP has been significantly overstating job creation versus BLS. At this point, their model is not a reliable tell as to what numbers BLS will generate.

Slack continues to build in the labor market. The employment-to-population ratio is now down to 62.7%. This is the denominator of the employment fraction, and is one reason why U3 unemployment has appeared so moderate. U3 Unemployment is expected to tick up to 5.1% — which is still relatively moderate. It is not that so many more people have jobs, but simply that less people are in the labor pool. The WSJ’s Ahead of the Tape column notes that "the ratio never fully recovered from the 2001 recession, partly because businesses have been more disciplined about hiring than in the late 1990s. Long-running secular trends — like women entering the work force — may also have peaked."

Regardless, we do know a few things before the 8:30am report: The overall employment trend is negative, especially in new 1) private sector job creation; 2) real wage gains; 3) hours worked. These all bode poorly for near term consumer sentiment and for non essential consumption.

Speaking of sentiment: Merrill Lynch’s David Rosenberg has pondered the relationship between low consumer confidence and soft — but not abysmal — job creation data. He tries to reconcile why merely moderate job losses have created consumer sentiment levels typically observed at much much deeper recession lows. The two are inconsistent with what you would expect from the current slowdown. Why should current economic measures — not showing an economy deep in recession by most traditional metrics — have a sentiment reading that is usually concurrent with a much worse environment?

One possible explanation: Job growth may have started to slow much earlier than previously thought — as much as a full year earlier. Evidence for this can be found at the Business Employment Dynamics (BED) section of BLS.

What are Business Employment Dynamics?

"Business Employment Dynamics is a set of statistics generated from the Quarterly Census of Employment and Wages, or ES-202, program. These quarterly data series consist of gross job gains and gross job losses statistics from 1992 forward. These data help to provide a picture of the dynamic state of the labor market…

Business Employment Dynamics measure the net change in employment at the establishment level. These changes come about in one of four ways. A net increase in employment can come from either opening establishments or expanding establishments. A net decrease in employment can come from either closing establishments or contracting establishments. Gross job gains include the sum of all jobs added at either opening or expanding establishments. Gross job losses include the sum of all jobs lost in either closing or contracting establishments. The net change in employment is the difference between gross job gains and gross job losses."

In theory, this should be a much less noisy data series, and provide a more accurate final read on total employment. They also form part of the basis for NFP revisions.

The data released up to the third quarter of 2007 suggest that private nonfarm payrolls could be revised down by 500,000 when the next benchmarking of payrolls takes place early next year.   

Here’s where the correlation between sentiment and employment get reconciled: BED data says private payrolls stagnated in mid-2007. According to BED, there was virtually no  private payroll growth during Q2 and Q3 in 2007. The pre-revision data from BLS shows more than 500,000 jobs created over same period of time period. Hence, a potential downward revision of half a million workers in 2007 is a probability. 

The BED data implies that BLS has overstated NFP by 41k per month. This might help to explain the ADP errors, the very negative consumer sentiment 9versus where you might surmise it should be), and the retail strength in discounters  over the past few months.

BLS releases NFP data at 8:30 am.


Business Employment Dynamics

U.S. Economy Probably Lost Jobs in May for Fifth Straight Month
Shobhana Chandra
Bloomberg, June 6 2008

Job Market  Appears Likely To Bump Along
WSJ, June 6, 2008; Page C1

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What's been said:

Discussions found on the web:
  1. Doug commented on Jun 6

    The consumer confidence gap is, as you say, supported by the BED explanation and it’s suggestion of downward revision of half a million jobs.

    AND, another possible explanation for this gap pertains to the shrinking debt capacity of consumers. Instead of wages, hours and jobs, millions of consumers relied on debt capacity to finance consumption. With the fall in housing — and concomitant drops in debt capacity to finance cars, TVs, etc — the ‘engine’ of the economy (65% to 70% of GDP) is sputtering badly.

  2. bonghiteric commented on Jun 6

    plumbing the depths of arcane BLS data sets… its Friday dangit!

  3. Vermont Trader commented on Jun 6

    those teenagers really need to get serious about finding summer jobs or the stock market is going to crash.

  4. bonghiteric commented on Jun 6

    Whoa doggy, consensus just got blown out of the water

  5. Jim commented on Jun 6

    The Birth Death model added 217,000 jobs for May, including 42,000 in construction and 9,000 in Finance. Give me a F$#@ing break. The BLS needs to change their methodology. Their credibility is shot producing this crap.

  6. stuart commented on Jun 6

    Given the adds to construction and finance, in fact the entire 217,000 ghost jobs, you have to wonder if the folks at the BLS are on a deliberate campaign to outdo the NAR in a campaign of credibility self-destruction. It’s a face so far that too close to call. CPI stats, GDP stats, unemployment stats….. Baghdad Bob’s spirit is alive and well.

  7. dblwyo commented on Jun 6

    When you look back at continuing unemployment claims they’ve been much higher relative to initial by historical standards. This economy hasn’t made it into organic growth and job creation. This is also born out by a much steeper downturn in hours worked and unit labor costs – which would be rising if either inflation was a problem or there weren’t enormous slack in job demand. This has been a slowmotion slowdown in the economy jobwise since ’06 which is about to tip over the cliff in the next few months based on these indicators.

  8. cinefoz commented on Jun 6

    Well, my mistake.

    It looks like the spin masters have been temporarily overwhelmed by the employment news. Just wait a couple of hours. Some group of influential nitwits will proclaim that most of the news had already been discounted in the market .. which is, in truth, the all knowing price oracle of all events. The rest of the news is either a seasonal adjustment anomaly or something that will be revised next month and should be ignored today.

    Looks like I picked a good day to cancel my stock order yesterday. I feel smug. In truth, the economy is starting to look like shit and even the stock market won’t be able to ignore it much longer. Things won’t look better until the price manipulators in energy get taken out of the market and enough time has passed to fix the damage they created.

    Larry Kudlow will blame Democrats, claim taxes should be reduced massively to promote GDP growth, act like deficits don’t matter and shouldn’t even be discussed, and then put the Dynamic Duo on to provide another bathroom break. I suspect his average viewer needs several per hour. Which is also why there is so much shouting. Hearing and attention spans diminish rapidly in elderly people who don’t challenge their mental skills and only listen to the same message over and over again.

    Flash … CNBC just called ‘the statistical anomaly’. Life is back to normal.

  9. stuart commented on Jun 6

    Larry Kudlow: Damn you Obama!

  10. Roman commented on Jun 6

    OK, well to those who say who claim the media is too positive, what about this incorrect Yahoo! Finance headline:

    “Unemployment Rate Jumps to 22-Year High of 5.5 Percent”

    I think they meant to say that the unemployment rate had its biggest monthly jump in 22 years. Kinda of a big mistake.

  11. N commented on Jun 6

    I-BERRY, 3G-I-phone will save the world; don’t count out Steve Jobs and AAPL till Monday 2 PM — and then the real sell off starts — then you go away on Monday and come back in November!

  12. VennData commented on Jun 6

    LEH should take over the reporting for the BLS

    Actually, I think Dick Fuld is smart to get Erin Callan out there in the public eye. This way the Street associates a name with these squishy Birth-death-model-esque valutation gymnastics they’ll be presenting the next few quarters; so he can have someone take the blame… the fall girl as it were, ala Zoe Cruz.

  13. Douglas Watts commented on Jun 6

    If there was no minimum wage, more businesses would be able to offer people jobs.

    BR: Doug, do you have some data or any link you want to provide with this?

    Something a touch more authorative or persuasive would be appreciated

  14. Howard Veit commented on Jun 6

    These data studies are just make work for the PhD class too lazy to actually work up a sweat while working. I have an ex-wife who manages two large apartment complexes and a client who owns like six and both have been telling me for months that the tenants are talking about little else than “foreclosures.” Some tenants are a little thin on the gene pool but others were looking to buy if they could clean up their horrible credit. In other words you have to be terminal not to be pessimistic in the face of millions of people losing their homes. To expect the “consumer confidence” to soar with news like that is idiocy and all you have to do is actually talk with people to see what they are thinking about. Foreclosures are affecting everyone’s psyche and not causing elation to anyone other than those who shorted the right index.

  15. wunsacon commented on Jun 6

    Millions of jobs paying greater than minimum wage have been shipped overseas. Millions. Minimum wage doesn’t begin to explain that.

  16. The Big Picture commented on Jun 7

    More on May 2008 Employment

    As a follow up to our NFP extravaganza yesterday, here are a few additional items you may find informative: Yesterday, we noted the big jump in Unemployment (a historic outlier) and wondered aloud whether it might be attributed to, in large part, a sea…

  17. Tim commented on Jun 8

    Great stuff!

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