Tuesday, June 11, 2013

Is the Monthly Economic Number Really Bullshit?

On Friday, I wrote the following about the monthly BLS data release:

OK -- I disagree with the birth/death model argument, but that's beside the point.  The monthly NFP data point -- and all of the hoopla that surrounds it in various forms -- is pure bullshit.

First, this was a bit of an over-reaction on my part.  What I meant to say was the hoopla associated with this statistics release is bullshit.  Every month, starting on about Wednesday, everything stops in anticipation of the report.  The excitement and tension builds with the financial world literally stopping by Friday morning.  Then, a ton of people (primarily political flunkies) who have no business analyzing the report do so, issuing proclamations from on high.  By Monday we all settle down forgetting the madness that is the monthly NFP release until the next round in 30 days. 

Just as importantly is the NFP report is subject to several revisions, meaning the number that has the most impact -- the headline number in the initial release -- could be revised to the point of being non-recognizable to the people who first heard it.  Now -- all economic numbers have this problem.   But very few economic numbers inspire the level of focus as the monthly NFP data.

Let's stipulate the following point: the jobs market is one of the most important economic indicators out there, if not the most important.  An economy that is primarily based on consumer spending cannot move forward without a healthly jobs market.  But, as the Atlanta Fed has correctly pointed out, the jobs market is composed of several different, measurable components.
  • Employer behavior: not what they're saying, but what they're doing relative to the jobs market.  Are they advertising open positions?  Are they actually hiring once those positions have been advertised?
  • Confidence: do businesses have enough confidence in the future to increase their hiring plans?  Are people confident enough in the jobs market to quit a job (with the most likely reason being that jobs are easy to get)?  More broadly, what opinion of the jobs market is held by both business and potential employees?  
  • Utilization: of all the people in the work force,is the economy effectively and efficiently using their talents?  Are people "just getting by" or are they really contributing to the overall development of the economy?
  • Leading indicators: where are we in the business cycle?  What is the likely direction of the jobs market in the next 3, 6, and 9 months? 
The point is there are a myriad number of components to a well-functioning jobs market.  A healthy market inspires confidence so that employers are willing to increase their hiring plans.  A longer period of confidence (multiple years, ideally) would lead to more efficient utilization of the labor force.  These developments could by objectively observed in employer behavior and the leading indicators.

The point of this is the monthly NFP ritual completely masks the complexity of the jobs market.  And that's something I'm finding more and more aggravating.