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Friday September 3, 2004 - 01:25:43 GMT
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Jobs, Jobs, Jobs

Jobs, Jobs, Jobs

It seems like an eternity since the US employment data, namely payrolls, was at all predictable. Well it was not that long ago...until January there were about 3 years of consecutive monthly declines in non-farm payrolls. And payrolls have grown on average about 175,000 a month since January. Easy enough. The economy seems to be weakening, or so the thinking goes, so shade down the average...hence 150,000 expected. Not sure the "rigorous" model crowd is generating more accurate estimates. But the problem is that the data points in the last 7 months have been anything but clustered around the mean as in a normal distribution. So economists forecasts on payrolls are little better in recent months than a randomly generated number. Rest assured the buy side is looking askance at the sell side payroll forecasts. Confidence levels for those who generate forecasts as well as those that use them is low. It follows that the market is no longer taking bets in markets ahead of payrolls, but looking to trade after the number. Indeed some of the selling in US Treasury market the last two days, despite weakness in August ISM, reflects unwinding of longs ahead of the payroll report. There is a growing incentive to be flat in front of this increasingly unpredictable statistic. Which means post-release volatility has a good shot at spiking on "outliers". On the other hand the growing recognition of the randomness of this series should reduce the desire to add to risk on an outlier. Net net one should look for the volatility to spike and retreat rather quickly. Sure the long US Labor Day weekend will contribute to reducing exposure and make for a rather early end to trading than might otherwise be the case.

For what it is worth the anecdotal evidence roughly weighs out with claims, ISM employment index, Chicago PMI employment index, and Challenger pointing to modest jobs growth. Florida's hurricane Charley poses some downside risk to payrolls, but this should be minimized by the fact that the impact was small relative to the 400,000 firms surveyed in the payroll report. In other words state claims offices pick up events like Charley more than BLS in the firm or household surveys (hence a factor in the recent weekly jobless claims).

What about President Bush hinting at a strong jobs number in his acceptance speech Thursday night? Never say never. But I think it is doubtful. The speech was finished days ago and the White House will not have the data until later Thursday afternoon. So it would take some engineering to shoe horn it into the speech. But more importantly it would bring light on an
area that has heretofore been his Achilles heel. And dropping hints on a strong gain in non-farm payrolls (from the firm survey) would be muted by recent weakness in the series and the administrations' efforts to emphasize the household survey where more jobs have been added, supporting the President's case on economic performance. Also worth noting that Bush's NEC director Stephan Friedman told Bloomberg TV today that the President will speak on the economy tonight and has more on his plate in addition to jobs data. So I think any celebrations on a strong report will await the post data TV appearances by Greg Mankiw, or some fancy tap dancing if the number is weak.

Beyond the politics of the jobs report, there remains the question of US monetary policy credibility. Poole in comments last week was arrogantly confident of the slowdown being temporary. Greenspan is surely as confident as ever that the slowdown is natural in a growth cycle and will not persist. These are assertions. Facts are facts. If payrolls (recognizing randomness and small share of overall employment in month-to-month changes in non-farm payrolls) are weak, the Fed's assertion of a slow patch will be pretty well indefensible. If markets reject the Fed's assertion tomorrow, the Greenspan premium should get marked down some and this will reduce his ability to guide expectations ahead with existing or new assertions. As it is now, the Greenspan premium is are irrationally exuberant over the Fed's ability to get it right. As such the single most important influence in the market at any given time is what Greenspan thinks on the first order
and then what Greenspan wants the markets to think he is thinking on the second order. No doubt Greenspan is better than good in forecasting growth and reading trends, his motivations are sound and his knowledge of markets and market psychology profound. But this level of dependency in the financial markets on Fed thinking which he has cultivated in recent years is not healthy and not sustainable. Friday could be the first step in weaning financial markets off Fed dependency. But the first step is incremental not qualitative. A weak number will not break ranges in euro/dollar (above 1.25) nor market fixation with Fed thinking over the data (nor will strong number establish a sustained downtrend in euro/dollar). Moreover, the Fed will hike come hell or high water September21. So for the Fed the data does not matter (much) for the time being...and markets will still largely reflect this (admittedly the rally in Treasuries in recent weeks has really been in defiance of the Fed there already is evidence of a lessening in dependency). A strong number will surely strengthen market dependency on Fed thinking...supporting the Fed's assertion the slowdown is temporary. And where is reality on payrolls? The significance of the difference between say +50,000 and +300,000 for one month in a volatile series like payrolls and as a share of the labor force or number working is pretty low. None of us should be drawing sweeping conclusions about the economy or policy regardless of the result Friday.

David Gilmore


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