Friday, April 1, 2011

What Would You Like The Numbers To Say?

NFP (Non-Farm Payroll) Report

A friend at work once told me a story about being the third person in the room when the CEO of the corporation he worked for met with the CFO. "What about the quarterlies?" The CEO asked, referring to Quarterly financial data. "What do the numbers tell us?"

After a pause, the CFO said, "What would you like the numbers to say?"

At 5:30AM PDST today, the Bureau Of Labor Statistics reported a net increase of some 216,000 jobs last month, lowering the reported unemployment rate from approximately 9.4% to 8.8%.

I'm reposting the article below verbatim from Barry Ritholtz's The Big Picture. I don't often repost someone's writing in its entirety (the assumption being that readers are capable of following the helpful link provided so you can read on your own). However, I'm only a Dog, no one listens to me, and Herr Ritholtz says all this more succinctly than I ever could:

Contextualizing the NFP Data
By Barry Ritholtz - April 1, 2011 - 7:17AM

The U.S. Employment Situation report aka Non-Farm Payrolls may be one of the most misunderstood, over-traded datapoint that exists. I want to contextualize today’s jobs numbers for readers in a way that helps you to understand what it does — and doesn’t — actually mean.

Please bear with me as I over-simplify this for illustration purposes.

To begin with, you need to understand the size and scope on the Labor market, and what is actually being modeled. There are about 140 million Americans working full time in the country today. Another 15 million or so would like full time jobs, but don’t have one. They may be working part time or not at all.

What the monthly Employment Situation report measures — in near real time — is the net changes in that number. Take the total net number of new hires, subtract the job losses, and you get the marginal change in Employment.

Since our starting number is so big (140m+), and the monthly net changes are so small (200k), the overall change is a statistically small number. Typically, the net change is between one tenth (140k) and one quarter (350k). During the height of the 2008-09 crisis, the net change was approximately half a percent (700k).

The model that produces the monthly number is part measurement (Establishment surveys), part extrapolation (Birth Death adjustment). This is then revised, as more and better data comes in later. The model gets re-benchmarked, seasonality is adjusted for, and one-off weather or other events impact (and that impact then attenuates away) the overall NFP series.

Thus, any single 0.1% data point needs to be recognized for what it is. One data point in a longer series. This is why I continually have emphasized the importance of longer term employment trends rather than obsess over any given month.

While employment reacts to the broader economy — this is why it typically lags the economic cycle — it does contain forward looking components. This is why we always track Hours worked, Income, and Temp help. These three components tend to lead the economic cycle.

Hence, there is lots of good and valuable information contained in the monthly NFP release — it's just not what most people think it is.


This month, consensus estimates are for 190,000 net job gains. In a normal economic cycle, this would be considered a soft number, barely greater than the 150k need to stay ahead of population growth. However, in a post credit crisis economy, where GDP remains middling and job creation is not robust, this is considered a decent number. To really move the needle on Unemployment, 300-400k per month (or better) is what is required...

This is not much different from what Paul Krugman has been saying for years (yes, folks; we're going into either the third or the fourth year of this Great Recession, depending upon whether you're counting from September of 2007 or 2008): In order to erase unemployment, you must create not only jobs for those sixteen to twenty million already unemployed -- but for the approximately 300,000 new entrants in the labor force, every month.

It's also something Rithholtz doesn't delve into here -- a question of what kinds of jobs all these people find.

If a middle-level manager, a teacher, or an aircraft mechanic are re-employed... as janitors, fast-food clerks, and taxi drivers... is that really a "Recovery"?

So, 216K new jobs are nice; better than nothing, but... Feh.

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