Snowstorms, Windshield Wipers, and Employment

After last week’s employment rate announcements, the US stock market took a big dive. Many words were written about the dire information in the report.  The report published by the Bureau of Labor Statistics consisted of about 20 short paragraphs accompanied by about 30 data tables and can be found at http://www.bls.gov/news.release/empsit.nr0.htm

I am sure that people thousands of miles away from the US will be impacted by the reactions to this report. Bus drivers in Delhi will be discussing the terrible situation in US labor markets. Angry teens in Bangladesh will set a few Russian Ladas on fire to show solidarity with union members in Wisconsin.  You get the picture – information moves fast and at long distance in 2013.

Except for the back of my father’s large and muscular hand, nothing came fast when I was a kid. I recall television advertisements that allowed me to send a few cents to someone somewhere and in return I would get a toy submarine. If you put baking soda in that toy submarine it would submerge in your bath tub just like a real submarine. Anyway, I can remember that it took weeks if not months for that stupid toy submarine to show up in my mailbox at 3170 Oak Avenue. I would check the mailbox every day! Girls were slower back then as well but that is another story. You get the picture. Children were supposed to learn patience.

The question is whether we are better off or not with all this speed today. I’d like to move on to phones and texting but let’s stay with the employment release of last week. The key message of this release is that while payroll employment increased in March, it did not increase enough to provide further evidence of a stronger economy. That is, the 88,000 increase in employment was a big disappointment. But was it really?

First, keep in mind that monthly employment changes are typically small. The total number of people employed in the USA in February of 2013 was about 135 million. So the percentage increase of 88,000 in March employment was about 0.65% (=.0065). If I lost 0.65% of my body weight I would lose about one tenth of one pound. Woowee.  Anyway, notice that even if the employment change had been more like 300,000 new jobs in March that performance would only amount to a tiny percentage increase. What matters more is the future course of employment changes. At 300,000 new jobs per month for a whole year – employment would increase by 3.6 million or by about 2.6% for 2013. That would be pretty nice. So far in the three months of 2013 employment has increased by an average of 168,000 per month. At that rate we might get 2 million jobs for the year for an increase of about 1.5%. To conclude this first point – the 88,000 was nothing to write home about – but what matters less is one month and what matters more is the future trajectory. The first quarter is not where we want it but by no means should we be burning our bras and/or jock straps.

Second, what does the 88,000 increase tell us? The answer is “not much.” Suppose you are like me and your weight varies a lot. So let’ suppose my typical weight change is about plus or minus 50 pounds per month. One month I gain 60 pounds. The next month I lose 40 pounds. Suppose I tell you I gained 55 pounds in March. Is that evidence that I am going to gain a ton of weight in April? In May? It does not. My weight swings a lot from month to month. The typical upswing or downswing is around 50. It would take a much larger swing in one month for you to bet on me gaining again and again. Of course, you’d bet more money if you saw me gaining more than 50 pounds each month for several months.

A statistical analysis of the payroll employment figure shows very high variability from month to month – to the tune of about 90,000 workers. Next to that the 88,000 means very little. It tells us nothing about the future.

In summary, the one month change of 88,000 is not only tiny but it is not statistically large enough to suggest anything is happening in the way of a trend. I can tell you that jobs have increased by about 504,000 in 2013 and in the 12 months between March of 2012 and 2013 the increase in payroll employment has been 1.9 million. The more data we have, the more complete the picture becomes. Yet the market knew most of that before Friday morning and the market seemed to go crazy because of the 88,000 announcement. Even the local Bloomington Herald Times had many articles analyzing last month’s dismal number.

Why does a seemingly meaningless number get so much attention? Aside from the fact that the news media has to sell information, my guess is that we get all this drama because we demand it. And we demand it these days because the future is so uncertain. Will we have a double dip recession? Is the economy on the mend and about to grow quickly? Does the economy have several years of slow growth ahead? If we knew the answer to these questions, we could plan our lives better and perhaps more profitably.

This uncertainty theme hits home if you think about driving in a snow storm on a road that you don’t know well. You do know that there are many twists and turns in the road. But with the snow, you cannot see more than a few inches ahead of your windshield. In such a situation, you are staring intently ahead and every time you see a change in the scenery, you are ready to begin turning the steering wheel in one direction or the other. Turning too slowly means you might miss the turn. Of course turning because of a false signal means you quickly steer the other way. You are on top of the situation and you watch everything that moves! You adjust quickly. Sometimes the information is correct and sometimes it is not. But you are watching every change as if your life depended on it.

Our deeply uncertain economic times are like such a snow storm. Each time an economic number comes out we react to it as if it had great content for the future. When we discover it had no such content, then we react to that discovery.  Telling the government to slow its delivery of monthly news is like asking for your windshield wipers to quit working. Ignoring highly erratic data is like driving straight ahead on a curvy road. Since there is always uncertainty about the future, we are stuck with living through a roller coaster ride of economic news. But with uncertainty heightened as it is today the roller coaster is no less than the infamous Kingda Ka.

One more point.  We learned nothing new about employment in March of 2013. The economy and employment continue to be deeply affected by very long-term factors (e.g. demographics, industrialization, globalization, government policy and regulation) and dealing with the aftermath of a deep and prolonged global financial crisis. Few spots in the world are growing rapidly and despite a lot of policy experimentation, both Republicans and Democrats are going to be disappointed if they are hoping to see anything but lackluster growth for the time being. Even if we got a huge spike in employment in April or May it won’t mean much of anything insofar as the big picture is concerned.

By the way, I am happy to report that I have not changed my tune in the last three years – in March of 2010 I said we would not have any real growth until we overcame three problems. My reading today is that we have made some progress on only one of the three and thus we are firmly stuck in economic purgatory. See my post – The Whack-A-Mole Recovery…. http://larrydavidsonspoutsoff.blogspot.com/2010/03/whack-mole-recovery-or-good-news-is-bad.html