Tuesday, May 29, 2007

something smells fishy / Pimco on the employment data

nothing new to readers of the blogging world. it is very telling when one of the most important statistics is almost useless....remember this when you hear the "experts" yelling on cnbc etc after the number from friday......one can expect a mega revision downward in august......if you want more on this topc surf the labels with lots of frustrating details on how flawed the data is......

dürfte für leser der blogs nichts neues sein. es ist aber bezeichnend wenn eine der wichtigsten erhebungen komplett nutzlos ist....immer wieder lustig wenn man mit diesem wissen die "experten" auf allen kanälen zu sehen bekommt....erneut an diesem freitag zu bewundern..... es ist jetzt schon klar das die nächste revision eine echte hausnummer gen süden sein wird ..wenn ihr mehr details zur erhebung wissen möchtet bitte unter den labels stöbern..

Here at PIMCO, we continue to expect the unemployment rate to go up. Thus, we are still (painfully, since December) long of duration, concentrated in the front end of the yield curve. And why are we still bearish on employment growth?

First and foremost, unemployment is a lagging variable, notably of momentum in discretionary aggregate demand. And discretionary aggregate demand has been unambiguously decelerating in recent quarters, and not just in residential construction, as displayed in the chart below.
The Great Puzzle
So why hasn’t the unemployment rate already risen? It’s the great puzzle, in the words of San Francisco Fed President Janet Yellen. The short answer to the puzzle is that the labor force participation rate has fallen, accounting fully for the drop from 4.7% to 4.5% for the unemployment rate over the last year. But this doesn’t make sense when you look at nonfarm payroll growth, which, again in the words of Ms. Yellen, has been gangbusters.
The labor force participation rate is decidedly pro-cyclical, meaning that it goes up as tight labor markets induce new entrants into the labor market; and it goes down when soggy labor markets lead the discouraged unemployed to drop out of the labor force. So, the short answer to the puzzle is the right answer only if nonfarm payroll growth really ain’t gangbusters.

And new research by both Ray Stone4 of Stone and McCarthy and Sheryl King5 of Merrill Lynch suggest this is indeed the case. Please refer directly to their research for the exhaustive details, but the bottom line is simple. Detailed data in the Bureau of Labor Statistics (BLS) Business Employment Dynamics (BED) release, which comes out with a two-quarter lag, show employment growth of only 19 thousand in 2006Q3, while the nonfarm payroll tally for that quarter was over 450 thousand. More recently, the BLS’s more timely Job Opening and Labor Turnover Survey (JOLTS) for April – last month! – showed job openings rose only 24 thousand, with this series essentially flat since last August. The JOLTS report also showed that new hires in March (this data subset is released with a one month lag) fell 29 thousand.

Something smells more than fishy here. Not that I’m accusing the BLS of any skullduggery. None! Rather, it is a historical fact that nonfarm payrolls – before annual benchmark revisions, which continue for six years! – understate employment early in recoveries (leading to the inevitable contemporaneous label of "jobless recovery"), while they overstate employment late in expansions.

And a key reason is that the BLS, while very good at counting heads at existing firms, must make an assumption, in real time, about the birth-death rate for firms, so as to estimate the net gain/loss in jobs as firms open and close, a never-ending feature of a capitalist economy. In the early years of expansions, the birth assumption systematically is too low and the death assumption is systematically too high, which results in "jobless recoveries," which turn out to be not-so-jobless recoveries upon revision. The exact opposite holds in the late years of expansions and particularly in recessions. Such is the case, it would appear, at present.

Thus, in contrast to last August, when the job tally for the year ending March 2006 was revised up some 800 thousand, a stunningly large revision, the opposite is likely to unfold in this August’s benchmark revision for the year ending March 2007. Not to suggest, I hasten to add, that a downward revision equal to last year’s upward revision is in the cards. The honest answer is that we don’t know how big it will be. But available data, notably the BED and JOLTS data, point squarely to a downward revision.

So what, you say. Economists always bellyache about the quality of the data when they go against their forecasts. This is true. It is also true, however, that poor data can make for poor policy making, if and when the data is taken to be religiously true. This is particularly the case if the data is known to be lagging data of the business cycle, as is the case with the unemployment rate. Acting on the data, or refusing to act because of it, is the stuff of policy mistakes, sometimes known as recessions
as i´ve said before they should hire the "statz crew"..... :-)

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