Explaining Non Farm Payroll & Analysis

Its tine for everyone’s favorite monthly data point, Non-Farm Payrolls.

For those of you who are relatively new to the site, here is a brief description of how our analysis has evolved over time.

Weak Jobs Recovery: Following the 2001 Recession, the economic recovery, from a jobs perspective, was rather weak. Indeed, from 2002-07, we had the weakest employment recovery of any post-recession period since World War 2. This data point — widely ignored on Wall Street and MSM — was a warning sign that the recovery was abnormal. It is what sent us looking for what was driving the economy — and the answer was borrowed money.

Survey Data: There are two employment surveys — Establishment and Household. Establishment works of employment tax data; Household is literally a Q&A survey. They sometimes vary dramatically, but when you control so they measure the same thing, they come pretty close to each other (most of the time).

Birth Death Adjustment: A major modification to the NFP measure is the Birth Death adjustment. Changes to the BD were proposed in 2001, and implemented a few years later. This attempts to capture early improvements in employment at the start of a recovery was the goal. The trade off is it wildly overstates strength at the end of a cycle. For example, in 2007, approximately 75% of reported new jobs were due to this adjusatment. In 2008, the BD adjustment inexplicably showed lots of job creation in construction and finance.

Measuring Unemployment: The main measure of Unemployment is the widely reported U3 Unemployment Rate — but my analysis of U3 has been that it significantly understates unemployment. Fortunately, a more complete measure of labor under-utilization is available —  the U6 measure. They seem to run parallel, but U6 captures a lot more of the unemployed and under-employed workers than U3 does.

Leading vs Lagging Indicators: Lastly, economists will tell you that Employment is a lagging indicator, meaning that it lags the economic cycle, getting worse even after the economy begins to improve.  And that is mostly true. However, since we are investors by trade, we want o identifty aspects of Employment data that have the qualities of a leading indicator — i.e., they improve before the economy does.  There are at least 2 worth paying attention to: Temporary Help, and Hours Worked. Both aspects improve or worsen prior to the a recovery or recession occurring.

Note that there was a lot of pushback against these ideas when they were first  discussed here; They have now more or less been recognized if not endorsed by many astute observers . . .


Employment Situation report out a 8:30 today; Bloomberg consensus is 365,000 jobs lost; Barrons Consensus is 350k witha  range of -435,000  to -225,000.

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