Counter-Intuitive View: Today’s NFP is Meaningless

Get a grip, people.

I’ve been dying to tell that to the parade of sycophants, pundits and talking heads who have been aghast at the possibility of a really really bad NFP number today.

Here’s a newsflash, folks: The employment situation in the US is bad. Whether today’s 8:30 data release is a loss of 1 million, or a gain of 50,000, it really does not matter one teeny bit.

Why is that? Because it really isn’t news.

Look, we know the economy has been in the crapper for a year. We also know it has gotten appreciably worse over the past 4 months. The trend has been negative for 12 months, and its going to keep getting worse for a while. I do not expect to see any sort of jobs recovery until deep into 2010 at the earliest.

We know that the NFP data is not very precise; They are subject to very significant revisions. And, with a Labor Force of 154 million (including more than 10 million unemployed), the monthly data are actually minor numbers, a very small percentages off of a large set. A 500k job loss is still less than a third of a percent of the Labor force. Tiny errors in percentages that small lead to what appears to be outsized changes.

Blame it on the recency effect: The tendency to overemphasize the most recent data point in a monthly series. It is a foolish way to ignore the trend and give greater emphasis to today.

Why should this one report matter so much? The only thing that I can think of is it gives the next stimulus plan an impetus to get over a trillion dollars.

But what about that 250 point sell off on Wednesday following the ADP report?

ADP was the excuse, but the more likely reason was the overbought condition of the markets. Up 20% in less than two months, with more than 80% of the S&P500 index trading over the 50 day moving average combined to create as good a reason as any for the selloff.

Sure, at some extreme, the numbers become somewhat worrisome: 1 million plus is a scary data point. But in the scheme of things, as bad as this number will be today, it is also relatively meaningless.

Other than that, you can file this NFP away: Expect it to be really bad (perhaps even 700k+), and expect it to matter very little.

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