Mr. Sensitive

June 6, 2013

The Most Important Fictional Employment Report Ever

Filed under: Uncategorized — lbej @ 13:43

The stock market is selling off today (Dow -100 points) on the heels of a 200-point drop yesterday, and is now nearly 5% below the all-time highs reached just two weeks ago and below the 50-day moving average (indicating a critical short-term momentum reversal) for the first time in months.  Just as shockingly, the U.S. dollar is down 3% against the yen today–currencies almost never make moves of more than one percent in a day.  The yield on the 10-year Treasury just broke back down through 2%, reversing a multi-week trend of rising rates that led to a recent rout in dividend stocks.  Volatility (as measured by the VIX) is at the highest levels of 2013.  What in the world is happening?

The Labor Department releases its monthly Report on the Employment Situation tomorrow morning at 8:30.

That’s it.  That’s what’s roiling every major asset market.  Tomorrow’s employment report is expected to be the biggest event for the financial markets since last year’s presidential election.  The consensus of economists surveyed by Bloomberg is that non-farm payrolls increased in May by 167,000.   Why does this matter?   Improvement in the labor market is the the be-all end-all for the Federal Reserve when it comes to monetary policy.  The Fed has stated that it will continue monetary stimulus (setting short-term interest rates at zero and using quantitative easing to hold down long-term rates) until there is evidence of sustained strength in the employment situation and they’ve even targeted an unemployment rate of 6.5% (the current rate is 7.5%).  This is now the most scrutinized employment report ever.  If the increase in non-farm payrolls is deemed too high by the market (200K+ jobs added), it will fuel fears that the Fed will end QE early, pulling the rug out from under inflated financial-asset prices.  If the increase is too low (less than 100K added), it will fuel alternative fears that Fed stimulus is increasingly ineffective and the economy is sliding back into recession, reinforcing several other high-profile economic indicators that have disappointed in recent weeks.  The volatility in markets over the past five days is a result of two enormous sources of uncertainty: first, investors don’t know if Friday’s report will be good or bad; second, and more critically, investors don’t even know what the market will consider good or bad.  It’s a mess.

What’s truly insane about this entire situation is that the numbers in the Labor Department report are fictional.  That’s right: the non-farm payrolls number we get tomorrow will be a fictional number.  I’m not trafficking in partisan conspiracy theory here; there’s no evidence that employment numbers have been politically manipulated (Jack Welch and his goblin-grunts notwithstanding) by this administration or any prior administration.  The employment report is a highly professional, systematic fiction, because the reported numbers are seasonally-adjusted (how?) and subject to after-the-fact revisions according to formulas that are nowhere-near transparent if they’re accessible at all.  Basically, technocrats take raw survey data and run it through a model several times before pronouncing that X-number of jobs were lost or added in a given month.  Consider this: last month’s report gave the April non-farm number at +165,000, but it also revised the payroll numbers for February and March higher by 114,000.  That means almost as many jobs were “added” due to Labor Department revisions as were supposedly added by employers.  I’m not arguing methodology here–I don’t understand it well enough to argue with it.  I’m arguing–in advance–with the reaction we’ll get tomorrow.  It makes absolutely no sense for the market to so be acutely sensitive to reported payroll numbers being too low (less than 100K) or too high (greater than 200K) when the Goldilocks (just right) range is narrow enough to be wiped out by a statistical revision.

It’s a mess, and I have no earthly idea what will happen.  I’ll be in Charlotte at the comic convention tomorrow, though, so for once, I won’t be watching.


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