The Search for Meaning in Jobs Numbers
Over the years, I have spilled far too many pixels on how overhyped the monthly nonfarm payroll report is. What matters isn't any single month, given how noisy and subject to future revisions the provisional release actually is. The recency effect makes you place a greater emphasis on what just occurred in a data series, a sign of the evolutionary leftover code hanging around your wetware.
Someone correctly guesses the number each month, but it seems to be fairly random as to which economist tossed the lucky dart. Instead of playing this game, let's look at the trend within the context of the broader economic environment. As I have noted before, this is a post-credit crisis recovery. As such, this cycle should be weaker than the typical postwar recession cycle: low growth, slower job creation, weak wage pressure. And so it has been.
QuickTake Monthly U.S. Jobs Report
Where that picture got confusing was in the first quarter. Gross domestic product contracted at an annualized rate of 0.7 percent; job gains also markedly slowed. A Bloomberg report noted that monthly job gains have slowed this year, averaging 193,750 compared with almost 260,000 last year. Was that first-quarter an aberration, or is the economy beginning to decelerate? Today's report, which showed a larger-than-expected gain of 280,000 jobs, suggests the possibility that the first quarter may have been a one-off.
If you want to make excuses for the weak first-quarter GDP and jobs performance, you had your choice of reasons: The weather across much of the country was awful, hurting retail sales and manufacturing, and a port strike depressed imports. The strong dollar was a drag on U.S. manufacturers as well. Europe and Greece remain a concern; China’s economy has slowed for three years and government efforts there to stimulate growth seem to have only created a huge stock market bubble.
The April payrolls report of 221,000 was closer to the earlier trend than the first quarter. Bloomberg's average forecast of economists had anticipated a May payroll gain of 226,000, with no change to the 5.4 percent unemployment rate (it rose to 5.5 percent because more people started looking for work). This all was mildly encouraging, though hardly definitive.
It's worth noting that wages remain the weakest component of the employment picture, though there are modest signs of improvement: The 2.3 percent year-over-year increase to an average hourly wage of $24.96 for private-sector workers is stronger than the 2 percent average this cycle. That’s the fastest growth since the summer of 2013.
The bottom line is the economy stumbled in the first quarter and we don't yet know if it was a one-off or an early warning sign that things are about to start getting worse. Today is only one in a long line of data points that suggest it may have been.
Today, however, you are required to engage in some second-level thinking. The payrolls report gave ammunition to those who think the Federal Reserve is on target for raising interest rates, beginning with an increase in September. Accordingly, bonds are down today. Second-level thinking requires not only that must you anticipate what the Fed will or will not do in response to these data as well as others, but you also have to anticipate what the crowd of traders will do as they engage in their own second-level thinking.
(Updates third, fifth paragraphs with today's economic figures, adds new sixth paragraph on wages.)
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