Saturday, September 08, 2007

Employment is not as bad as media coverage has suggested

Although the monthly employment report on Friday was in fact weak, it was nowhere near as bad as a lot of media coverage suggested. First, you should never judge a trend using only the latest data point. Second, "-4,000" is not a big number. As the report itself noted, "payroll employment was essentially unchanged" and "the unemployment rate remained at 4.6 percent." Payroll employment in August was 138.087 million as compared with 138.041 million in July, for a decline of -0.003%. That is a very tiny difference. The proper headline is that employment was "flat." A gain or loss of 40,000 is still a change of only 0.03%. Even a gain or loss of 100,000 is still a change of less than 0.1%. We are down in the noise level here.

The other standard comparison is year over year. A year ago payroll employment was at 136.438 million. So, August payroll employment was 1.599 million higher than a year ago. What's to complain about here?

Another factor to keep in mind is that this was not a report for the entire month of August. The payroll survey is for the pay period that includes the 12th of the month, so this report tells us nothing about employment in the last two weeks of the month. In other words, this is not "the most timeliest of data" of the sort that the Fed will use to decide what action to take at the FOMC meeting on September 18th.

The weekly jobless claims reports for the past four weeks provide more timely data and show a 4-week moving average of 325,750 initial claims which is is well below the 400,000 threshold typically used to judge that employment is probably declining. A year ago the 4-week moving average of initial claims was 316,500. These two numbers are essentially in the same ballpark. There is nothing here to suggest that there is any significant downwards pressure on overall payroll employment. To be sure, employment is not "booming", but neither is it "busting."

Possibly even most importantly, the latest Fed Beige Book which covers the period up through August 26th informs us that "Nearly every District reported at least modest increases in employment during the recent survey period." Please note that the Beige Book is not the Fed's view on the economy, but summarizes what the Fed is actually hearing from its many business contacts in the twelve Fed districts across the country.

To be sure, not everything on the employment front is rosy. For example, temporary help services has been trending downwards every month in 2007. But on balance, there is no overwhelming evidence of any pervasive weakness in overall employment.

Finally, the monthly employment report relies heavily on estimates and will be revised in each of the next two months anyway as more complete data becomes available. The revisions, up or down, could easily be much larger than the initial -4,000 number.

In short, if you are looking for ammunition to heavily justify a Fed  rate cut, you are not going to find it on the employment front, at least not yet.

-- Jack Krupansky

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