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Hatzius Finds Payrolls Poor as Economic Gauge: Research

Aug. 15 (Bloomberg) -- The monthly U.S. nonfarm payrolls report may not be as powerful an economic indicator as suggested by how investors respond to it.

A model created by Goldman Sachs Group Inc. economists Jan Hatzius and David Mericle found the employment data issued on the first Friday of each month does not “seem to provide much incremental information about the broad strength of the economy,” they said in an Aug. 9 report. The same applies for the first estimate of a quarter’s gross domestic product.

That’s even though an upside surprise in payrolls of about 80,000 jobs has historically pushed up the 10-year Treasury note yield by an average 5 basis points, while the Standard & Poor’s 500 Index rose by an average of 0.3 percent. The advance GDP data had the second-largest effect on Treasuries, at about 2 basis points.

By contrast, Goldman Sachs found the Federal Reserve Bank of Philadelphia’s business outlook survey, the Chicago Fed’s purchasing managers index, the Institute for Supply Management’s manufacturing gauge and initial jobless claims prove “considerably more helpful” in providing insight into the health of the economy.

The poor performance of payrolls and GDP are ascribed by the economists to the initial data often being revised later and lags in publication compared with more timely surveys. Part of the financial market’s “outsized sensitivity” to payrolls is probably due to the health of the labor market being cited by Federal Reserve officials, New York-based Hatzius and Mericle said.

* * *

The future of the U.S. economy isn’t what it used to be.

That’s the warning from Michael Feroli and Robert E. Mellman, economists at JPMorgan Chase & Co. in New York. They calculate the country’s long-run potential growth rate -- the pace at which inflation picks up speed -- is sliding toward 1.75 percent.

That would be the lowest since the post-World War II period and a decline from 3.11 percent in the decade up to 2005 and 1.97 percent in the past seven years.

Potential expansion depends on labor supply and productivity growth and both are headed lower, Feroli and Mellman said in an Aug. 12 report to clients.

U.S. population growth is slowing as the public ages and following a recent drop in immigration, they said. These factors will also exert pressure on labor-force participation, depressing the number of hours worked.

Entering a fierce debate, Feroli and Mellman sided with those who say the pace of technological advances is easing after IT drove a productivity boom from 1995 to 2005. This has reduced companies’ incentive to invest in more equipment. A pullback in spending on research and development may also sap productivity, they said.

Feroli and Mellman said if the U.S. economy’s potential does weaken, then its large amount of slack can be absorbed faster, allowing the Federal Reserve to normalize monetary policy more quickly.

* * *

Entrepreneurs tend to come from higher-income families, have better educated mothers and enjoyed taking risks as teenagers.

That’s the finding of a study by Ross Levine of the Haas School of Business in California and Yona Rubinstein of the London School of Economics.

“The combination of ‘smarts’ and ‘aggressive/illicit/risk-taking’ tendencies as a youth accounts for both entry into entrepreneurship and the comparative earnings of entrepreneurs,” Levine and Rubinstein said in a paper published this week by the National Bureau of Economic Research in Cambridge, Massachusetts.

They also found that entrepreneurs earn much more per hour than salaried counterparts. The results were gathered by dividing the self-employed into those who worked in incorporated or unincorporated businesses.

* * *

Unemployment is the strongest predictor of a U.S. household defaulting on its debt, according to a Federal Reserve Bank of Atlanta study.

An individual losing a job increases the probability of default by five to 13 percentage points, compared with an average default rate of 3.9 percent, four economists wrote in a working paper published by the regional Fed bank last week.

Only 13.9 percent of defaulters have both negative equity and enough liquid assets to make one month’s mortgage payment. That suggests to the study’s authors that defaulting for strategic reasons during the last recession was relatively rare.

The finding indicates policies aimed at boosting employment such as payroll tax cuts are most likely to stem defaults in the long-run rather than efforts to temporarily modify mortgages.

* * *

Norway, New Zealand and Chile run the most transparent sovereign wealth funds, according to the Peterson Institute for International Economics.

A September 2008 agreement by such state-operated funds to pursue accountability and transparency appears “to have been broadly but not universally successful,” Allie E. Bagnall and Edwin M. Truman wrote in a study published by the Washington-based research group this week.

The economists estimated that sovereign wealth funds had assets totaling $4.2 trillion by the middle of this year, an increase of almost 40 percent since 2010. In their survey of 49 funds, those of Equatorial Guinea and Libya ranked last for openness and accountability.

* * *

The sluggish increase in exports that often results from a currency devaluation causes sharper contractions and recoveries in emerging-market economies.

A paper published last week by the Federal Reserve Bank of Philadelphia looked at large devaluations in eleven emerging markets.

It found that the initial decline in output after a currency slide reflects the shift of resources to areas likely to attract foreign markets. That also hurts labor productivity.

The weakness is reversed in time as the economy taps overseas demand. The paper’s authors noted the argument that some euro-area economies may have benefited from a weaker euro during the region’s recent crisis.

“The common view is that a devaluation would boost GDP by leading to substantial expenditure-switching at home and abroad,” the study said. “We find that physical barriers to trade mitigate some of the stimulatory effects of devaluations initially while boosting growth in the long run.”

To contact the reporter on this story: Simon Kennedy in London at

To contact the editor responsible for this story: Craig Stirling at

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