Employment Numbers: Endless Drift

This morning we have been treated to an odd spectacle. Wall Street was very wrong about the number of jobs generated by the US economy last month, and is now scratching its head about what it all means.

First the figures: the economy added 195,000 new jobs to non-farm payrolls in June. Moreover, both the prior months were revised upwards, so that the average for the entire second quarter came in at 196,000 per month, only a little down on the first quarter’s 207,000 per month average.

Second the Wall Street view: by and large analysts had been expecting a much weaker figure – something in the region of 155,000. This comparative weakness was based on recent data that suggested the economy was slowing down somewhat from its first quarter pace. Manufacturing reports had indicated a slowdown, as had some of the other reports. Add in the view that the combination of tax increases and sequester spending cuts will slow growth down from its already anemic pace – 1.8% in the first quarter – and the prospect for strong job growth evaporates. Oh, and there’s the widely held opinion that the steady unrolling of Obamacare will inevitably stunt hiring because it requires businesses to provide health care coverage. This latter factor looms particularly large within the minds of those within the generally right wing oriented echo chamber that is Wall Street analytics.

Third: then there’s the bizarre way in which Wall Street analysts express themselves. Put bluntly: they say nothing, but talk a lot. Here’s Jane Foley of Rabobank:

“Very strong data should be good for risk appetite. However, the market’s likely reaction is complicated by the interpretation of what the numbers will mean for the Fed’s decision to taper QE. 

On June 26 the market celebrated the downside revision of US Q1 GDP on the assumption that this would lead to continued QE. This implies that a lacklustre improvement in US June payrolls could conversely fail to offer support to investor sentiment”

Or some anonymous source at Societe Generale:

“The Bureau of Labor Statistics’ (BLS) update on the employment situation in June will be the first of a trio of such reports that the Federal Open Market Committee (FOMC) will consider in advance of its 17-18 September meeting.

A reversal of May’s labour-force induced rise in the civilian jobless rate, combined with yet another above-consensus payroll print, likely will reinforce expectations of an asset-purchase tapering announcement at that time.”

Then there’s Paul Dales of Capital Economics:

“The recent survey evidence leaves us content with our forecast that US payroll employment (13.30 BST) rose by around 150,000 in June. That would be slightly smaller than May’s 175,000 gain. The 188,000 rise in the ADP measure of private payroll employment in June and the rebound in the employment index of the ISM non-manufacturing survey in the same month bode well for official payrolls. But the employment index of the ISM manufacturing survey fell to a four-year low. If the alternative household measure of employment and the labour force also both rose by around 150,000, then the unemployment rate would have been stable at 7.6%. A pick-up in jobs growth in the coming months would leave the Fed’s QE3 tapering plans on track.”

I lifted all three quotes from the Guardian this morning. I can’t quite make out whether the Guardian thought these quotes meant anything, or whether it was spoofing Wall Street.

None of them actually talk about the meaning of the numbers in any real sense. They are all obsessed with what the numbers mean for the Fed’s potential relaxation of its current QE policy. I understand this is important to the world of finance, but it would be nice to hear what analysts thinks about what the numbers mean for the rest of us. Let’s face it the financial world is long departed these shores and now seems more inclined to trade amongst its own based upon gossip, and reactions to interpretations of hearsay and insider tips exchanged at the bar last night. What’s going on in the real economy matters not a lot. What matters is how other traders will react to the expectation of how other traders will react.

Yes, I just said that.

The obsession with the Fed is understandable within such a byzantine world. Money is made by judging the meaning of nuances, innuendos, style, and the way in which Ben Bernanke combs what’s left of his hair. Money is made by watching and guessing the next move of the ratio between two indices, not by giving a hoot about the substance of what is driving those indices. In other words, money is being made by speculating in mid air, with the speculators not needing an understanding of what’s going on down there on planet earth.

Hence the vapid analytical statements.

For the rest of us, here’s what I think of this morning’s figures:

They are not very good.

They show that the economy is withstanding the negative impact of current economic policy. But only just.

They indicate that we are limping along in quasi stagnation and that the economy is generating just enough activity to keep the employment situation out of the panic zone.

They suggest, to me at least, that the economy would be about 0.5% to 1.0% better off were it not for the lunacy that is Washington policy.

They are too weak to push the Fed into changing its mind on QE any time soon. So interest rates will stay low for a while longer.

And, given that the job market is usually the epicenter of inflationary pressure, they suggest that the prospect for higher inflation is close to zero – despite what the right wingers keep saying.

Let’s all face it: a 196,000 per month hiring average is not very good given where we were. It barely keeps up with population growth and is not enough to bring the unemployment rate down – the headline unemployment rate is stuck at 7.6%.

Perhaps the biggest problem we have is that this limping along is just sufficient to prevent anyone in Washington having to dig in and do anything. Policy can stay anti-growth, and high unemployment can elicit a shrug rather than any concern. Remember: there are plenty of studies that show the unemployment rate doesn’t have much impact on elections. What matters to voters is the change in unemployment in the run-up to an election. Apparently voters can get used to high unemployment, and only worry if a shift seems to signal a threat to their own job. That makes sense, but it means that policy can sometimes allow for endless drift.

And endless drift is where we are.