Friday, April 24, 2015

Putting Some Perspective on the March Jobs Figures

The jobs numbers released last month were, by any measure, a tepid take on the performance of the US economy in March at 126,000, and despite the fact that the Bureau of Labor Statistics (BLS) also tempered the first pass at the spectacular job figures for February, which were revised down to a net 264,000 new jobs created, the consensus on Wall Street was that the economy was sagging.  This led to all sorts of speculation that now the Fed wouldn't raise rates until the fall or even into the back end of this year, but I think all this Fedspeak is frankly misguided.  The Fed is simply NOT going to base it's judgement on one month's numbers, and particularly a month that was, by any standards, unseasonally cold and unusual.  So to get this out of the way right at the beginning of this blog, I will state for the record that I still think the Fed will raise rates in June, and September at the very latest, for reasons I have elucidated in previous blogs postings.  My reasoning hasn't changed here, and no slightly weaker sets of data will affect the business cycle and monetary policy "normalizing" arguments.

But I digress.  What I want to address here is the BLS labor data released last month, and the reasons why I think the data will get revised upwards, and even if it doesn't, why it really doesn't merit the type of response it got from the markets.  So first, I know that most of the readers of my blog will recognize that one month's numbers do not a trend make - and this data point, in my view, was simply a blip on an irregular cyclical pattern. Now if we get April and May numbers below 100,000, then I will change my view, but one datapoint in the 100,000s range should cause panic, and particularly not at the Fed, as other data on wage increases suggest that wage increases are now accelerating which points to a tightening labor market, which is not surprising given that we're now at a 5.5% unemployment rate.

US Non-farm payrolls (sa)
2007 to date
The points I would like to make about this datapoint are as follows: when one looks at this data on a longer term basis then there does appear to be a small drop off in employment but this also happened at the beginning of 2012 or 2014, and the economy bounced back nicely from those points. But probably most importantly, the March datapoint was not an outlier, it was just a little disappointing. This is shown in the figure to the left.

US Non-farm payrolls (sa)
1939 to present
So why should it have been disappointing? I think there are clearly 2 reason - first, and probably most importantly, the layoffs that are now occurring in the energy sector given that the oil price is clearly not doing following the "v" shape that some expected.  The "j" (on it's side) shape of price trajectory that we are now seeing means that although the highly indebted small and mid-sized oil companies will have to lay off workers, the larger oil companies will be much better able to tough it out.  These oil layoffs, therefore, will be very much one shot deals, which although now occurring, will not trail beyond around 3 months in my estimation.

The other reason for such a tepid growth figure is that the north of the country once again got a really cold blast this winter, and as I was up in Boston in March (seeing Thomas Piketty speak among other things), so I can personally corroborate that fact!  In fact by some measures that part of the country got record amounts of snow this year. Now the figures are "seasonally adjusted" so do take account of the lower level of labor market activity in different seasons, but the statistical methodology can only account for the average level of seasonality - it cannot detect outliers - so these will inevitably show up in the data, which, I believe, they did.

Now the second point I would like to make is that when you observe the full sweep of non-farm payroll figures going back to the beginning of the series (see the figure above), what is clear is that although the figures in the upturn that we have seen might be slightly lower than those observed in the 1992-2000 period, they are certainly not out of line with figures from previous decades.  In fact the level of net job creation appears to be very much in line with what we observed in the 2003-2006 period and back in the 1960s as well. In other words it is somewhat of a myth that jobs have not been created at the same rate that they have been in the past, as it depends which "past" business cycle you look at!

In fact one of the biggest observations I see from this longer series is that there appears to be several highly irregular cycles at work in the data - and although obviously the negative observations occur mostly during recessions, the positive datapoints also appear to show a lot of cyclical behaviour.  That obviously calls for some analysis - and so I will definitely be using this dataset for a future academic paper.  Stay tuned folks!

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