Employment Drizzle

Much like the temporary panic last summer, markets today reacted negatively to a seemingly dour US employment report.

Closer inspection reveals many reasons to be skeptical of a bearish conclusion.

On balance, employment once again grew and unemployment remains at low levels.

_______________________________________________________________________

Well, it's been an inauspicious start to the year. Stocks took a walloping today, with the S&P 500 losing nearly 2.5%. Cap that with one of the worst storms in memory out here in the usually temperate California Bay Area, and it's safe to say things could be better.

Markets latched on to the Labor Department's Establishment report on US employment today as the latest reason to shun stocks. But while the water levels rise and the rain pours down in California, we don't see nearly as big a tempest brewing in the employment outlook.

We don't mean to sugar coat the report—it's not particularly encouraging. It's just that, like so much economic data recently, folks seem to be carrying the possible negative implications to a polar extreme and misinterpreting the facts. For instance, "This [the employment report] tells you that the strains from credit problems and so forth that have been developing the last six months are starting to bite and they're biting in a way that now finally draws consumption into question." Here's the full story:

U.S. Economy:Job Growth at Weakest Pace Since 2003
Bob Willis and Joe Richter, Bloomberg

Let's try and unpack a bit of the data and see what we can uncover.

According to the article, "payrolls rose by 18,000, capping the worst year for job creation since 2003." So first, and most obviously, this was yet another month and year of job creation. No matter how you slice it, that's inescapably true. The annual result is especially important. Why? Because monthly employment reports are fickle things—they swing wildly and get revised all the time. In fact, the numbers swing around so wildly that the fine print in the Labor Department's Establishment survey actually says changes of 104,000 jobs or less in the employment report aren't statistically significant! No joke!

Remember the mini-panic over employment back in early September, when markets took a similar one day thrashing?

Belaboring Labor
9/7/2007

That fiasco was based on a similar report. At the time many asserted—confidently—that the then very weak employment report was proof positive of an upcoming recession and consumers would soon be tapped out. Just like they're saying today. As it turned out, third quarter GDP growth blew expectations away and US consumption grew nicely this past holiday season.

Additionally, that report was revised much higher a month later. Why? Because employment reports are often more about statistical jiggering than straight reporting. Normally, because school begins in August and teachers go back to school, the Labor Department folks doing the employment calculation create a sizable negative seasonal adjustment to balance out the temporary positive effect. This is an extremely subjective and inexact science. It turned out the original adjustment was far too big, making the headline number look terrible. By September, things were back to normal and the August report was revised substantially upward once the dust settled.

Here we are today, in a very similar situation. Huge negative adjustments were made to the December employment report to account for the short-term hiring retailers do during the holiday shopping season. Taking out the seasonal adjustment, retail hiring actually grew. But for argument's sake let's accept that the negative seasonal adjustment is justified and the loss of 24,000 retail jobs is correct. That still isn't a big deal because it's a loss of 24,000 from a retail workforce of over 15 million, representing less than two tenths of a percent in just one section of the workforce!

Similar-sized losses in construction and manufacturing in December were fairly substantial, and we don't think they can be easily attributed to seasonality. However, those losses were largely expected tied to housing market and residential construction trouble. Again, as percentages of their total, those loses were meager too.

Clearly, just like August 2007, there are many good reasons to withhold judgment on this single employment report. By the time folks have locked themselves in the storm cellars, they're likely to find this whole hullabaloo was little more than a drizzle.

Have a great weekend.