NFP: Understanding the Lag

NFP is out shortly, and the consensus is for an ugly number. U3 Unemployent is expected to rise to 8.5%, NFP loss is for 660k, according to a Bloomberg survey. Since the recession began in December 2007, the economy has already shed 4.4 million jobs. A 600k number will push the total recession losses over the 5 million mark.

One of the sillier things I keep hearing from the usual suspects it that since NFP is a lagging indicator, it doesn’t matter much.

This is an inappropriate way to analyze the employment data.

It is true that as a whole, employment data lags the cycle. This means the data series will still be negative even after the economy flips positive. On the other hand, Leading Indicators flip positive while the economy is still contracting.

While NFP lags the economic cycle, one should simply disregard the data. One cannot conclude — as some people have on TV — that the economy is improving and therefore NFP can be dismissed out of hand as a lagging indicator

Instead, if you are dissecting this data, you should be considering which parts of NFP are not lagging, and pay close attention to that. That means looking a three components

-Temporary Help

-Hours worked


All three of these tend to lead the cycle. These data points were falling long before either the market or the economy turned south. I expect they will stabilize before the economy improves. If I have a few free minutes later, I will update this data later.

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