Thursday, March 5, 2015

An Employment Surprise Is Overdue

Tomorrow, the BLS releases its monthly report on labor, commonly referred to by its acronym, NFP (non-farm payroll).

This is the single most followed statistic about the state of the economy, giving onlookers a regular view into employment and wage growth.

 There are three things to know about the NFP data.

First: The most important is that the annual trend in growth has been very consistent. In the past three years, the rate has varied from 1.5% to 2%. In the past three months, that has started to exceed 2% for the first time in 15 years; the rate of growth in January was 2.3%, the highest since June 2000.

Second: While the trend is clear, it's common for the monthly prints to be volatile. The chart below looks at the 1980s-2000s. It has been a regular feature of monthly reports to vary from zero to over 400,000-500,000. Even during the 1990s bull market, NFP was negative in 1995, 1996 and 1997. It was close to 100,000 several times in 1998 and 1999. The 2002-07 was the same, with multiple months near 50,000 during the heart of the bull market.

Why is there so much volatility? Leave aside the data collection, seasonal adjustment and "weather" issues, appreciate that a "miss" or a "beat" of 80,000 equals just 0.05% of the total US workforce of 160 million.

Third: Which brings us to tomorrow's report. What has been most remarkable recently is how consistent the monthly NFP prints have been. There hasn't been a monthly print under 200,000 in 11 months. Between 1995 and 2000, that happened about every 4 months; the longest stretch was 8 months. It's been unusually strong in the past year.

Tomorrow's print may continue the pattern being close to expectations (currently 235,000). But don't be surprised, or dismayed, if the print is much lower.

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