Thursday, September 2, 2010

Sorting Out Contradictory Jobs Information

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Four jobs related reports were released in the first two days of September and they seem to indicate a contradictory view of the U.S. employment situation.

The weekly unemployment claims number was 472,000 for the last week of August, almost exactly the same as the 470,000 figure for the first week of January. Payroll processing firm ADP predicted yesterday that the U.S. private sector lost jobs in August because of a big employment drop in the 'goods producing sector'. At almost the same time, the ISM manufacturing index was released and indicated substantial hiring took place in U.S. manufacturing companies in August. Adding more confusion to the mix, outplacement firm Challenger, Grey, and Christmas said there was a sharp drop in planned layoffs in August.

The rule of thumb for recession is a weekly claims level over 400,000. This has existed continuously in the data for over two years now. Eight months into 2010, the only difference from the beginning of the year is that the four-week moving average is now 20,000 higher at 485,500. At no point during the 'recovery' did weekly claims fall to a level indicating the Great Recession actually ended. Weekly claims however should automatically fall during a protracted recession because big companies can only cut so many jobs until they get to a bare bones staff. This doesn't mean the economy is getting better, it means there is no one left to lay off. The Challenger, Grey and Christmas report on planned layoffs supports this view. Weekly claims will remain high under such circumstances if a lot of companies are going out of business because of ongoing recessionary conditions.

While there is no inconsistency with the weekly claims and the Challenger, Grey and Christmas data, the ADP and ISM employment data directly contradict each other. ADP's numbers are based on payroll processing while ISM's numbers are based on a survey of purchasing managers (the government's employment report is also based on surveys). The ADP report stated there was a significant drop in manufacturing hiring in August and the ISM report claimed there was a significant gain. The ISM report also showed a decline in the new orders component (Why would there be a substantial increase in hiring when there is less work to do?). Perhaps we will get some clarification in the government's August employment report tomorrow. 

There will be no sustainable economic recovery until private sector hiring picks up. This hasn't happened yet. While the mainstream media has reported otherwise, government numbers on private sector hiring include education jobs (almost all of which are government) and health care jobs (many of which are paid for indirectly by government programs). The private sector temporary jobs category in the employment report also has a footnote stating jobs from other categories are included. Could those other categories be government jobs? Looks like it, since once the Census stopped hiring, new temporary employment seems to have dried up. At the moment, it looks like any real recovery in private sector employment is a long way off.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

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