A Ray of Light? Further Analysis of the May Jobs Report
Here's what David Rosenberg had to say about this morning's jobs report. I'll tell you why I disagree with his assessment of it after:
Where Perception Diverges from Reality
The headline nonfarm payroll figure came in above expectations at -345,000 in May — the consensus was looking for something closer to -525,000. The markets are treating this as yet another in the line-up of 'green shoots' because the decline was less severe than it was in April (-504,000), March (-652,000), February (-681,000) and January (-741,000). However, let's not forget that the fairy tale Birth-Death model from the Bureau of Labour Statistics (BLS) added 220,000 to the headline — so adjusting for that, we would have actually seen a 565,000 headline job decline. At least initially, this skew to the data is being readily dismissed.
To Mr. Market, this was not a case of employment declining 345,000, it was a case of the rate of change improving by 159,000 from April and by 496,000 from the weakest point of the cycle back in January. So, what Mr. Market is doing is extrapolating this so-called improvement into the future and drawing the conclusion that employment is going to start to turn positive on a 'first-derivative' basis by August, at which time we will all be bidding au revoir to the recession.
I completely agree with Rosenberg that anyone who takes the 345,000 number at face value and believes that job losses are headed to 0 any time soon and that the recession is over is way off base. Add in the fact that the Census Bureau added 70,000 jobs to the report and the numbers clearly aren't good.
However, what Rosenberg fails to mention is that the absurd birth / death model that the BLS uses has been adding phantom jobs to the labor report for a loooong time. You can't back out the birth / death additions from this month and compare it to the numbers from previous months without backing them out there as well. Apples to apples, jobs are still being lost at a rapid rate BUT the pace of the deterioration in the labor market has slowed significantly.
This is the first time that I have had a serious problem with Rosenberg's assessment of the economic data during this recession.
I much prefer The Big Picture's Barry Ritholtz's analysis of the report:
While many view the decelerating job losses as signaling the end of the recession, they appear to me as signaling the end of the panic period of the credit crisis. We are now in an ordinary, as opposed to historic, recession.
I completely agree with this assessment. Another positive aspect of the May report was the slowing rate of temp job losses. Many economists view temp jobs as a leading indicator for regular jobs as they serve almost as an entry point to full-time positions. One can debate whether that is actually the case, particularly in the current recession, but temp jobs are definitely something to keep an eye on.
Further evidence that the pace of the decline in jobs is slowing can be seen in this week's weekly jobless claims. Much like the May employment report, the weekly jobless claims were bad...the number of people filing new claims for unemployment insurance in the week ending May 30 fell 4,000 to 621,000.
That is a terrible number. That's a lot of parents who will have a harder time providing for their children. When one thinks about this in those terms, this is a very, very sad situation. However, looking at things objectively (one might say in a machiavellian manner) there was a ray of light in the numbers. The number of people continuing to receive unemployment insurance actually dropped for the first time in 20 weeks.
Similarly, while the weekly jobless claims have been terrible...over 600,000 for 18 consecutive weeks, the numbers have stopped getting worse and they are actually improving slightly. They have dropped in seven of the last nine weeks since peaking in late March.
I'm not saying that the economy is in great shape or that things will get better soon, just that the end-of-the-world scenarios that many are paining seem less and less likely as the year progresses. As I mentioned in my previous post, for some time I have believed that the rapid rate in the deterioration in the economy that we witnessed at the end of 2008 and the beginning of 2009 would begin to moderate and that we eventually would settle into a several year period where the economy muddles along in something between an "L" and a "U" shaped recovery with period of slower growth than we have become accustomed to over the past decade.
I may or may not have time to post another message before the end of the day. Everyone have a great weekend.