The Most Important Number In Friday's Jobs Report (That No One Talked About)

by: Lawrence Fuller

- Markets surged on what was perceived to be a blockbuster jobs report.
- A far more telling statistic in this report indicates just the opposite.
- The labor market continues to deteriorate and Friday's strong number was an outlier.
Markets surged on Friday in what was a feeding frenzy for financial assets of all kinds. We saw stocks, bonds and commodities rise on the tailcoats of what was perceived to be a stellar US jobs report. This headline from the Wall Street Journal sums it up -
"A powerful rebound in hiring last month eased fears about an economic downturn as the US expansion enters its eighth year, putting the nation on solid footing to absorb global shocks and market turbulence."
I came to the opposite conclusion, based on what I believe to be this report's most important number, which continues to deteriorate. It was the decline in this number at the end of last year, which I shared with readers in a detailed report in January, which led me to the conclusion that we would see a significant slowdown in job growth in 2016. This was a contrarian forecast at the time, but it has turned out to be extremely accurate. Yet this number was given no mention by the labor market experts who discussed Friday's report on any of the financial news networks. The consensus viewed the overall report as a blockbuster.
Based on the estimate from the Bureau of Labor Statistics that 287,000 new jobs were created, the consensus of economists concluded that last month's dismal new jobs number of just 38,000 was an anomaly. Here is why I think this month's number of 287,000 is the outlier.
The data point I am focusing on in this analysis is the average revision between the initial estimate of the number of jobs created each month and the final number. The initial payroll report can be subject to significant revisions. The BLS states on its website that the margin for error can be as great as 100,000 jobs per month. All surveys are subject to some sampling errors. This is why the BLS makes seasonal adjustments to its data depending on the month of the year.

It also makes an adjustment to the payroll number in order to account for the job creation it assumes is resulting from the formation of new businesses that are too new to be included in its survey. The statistical model it uses for this calculation is called the birth/death model. One downside to this model is that it misses turning points in economic activity. It overstates job creation by new businesses as the economy is slowing or contracting, because fewer new businesses are being created.
It also understates job creation when the economy is starting a new expansion and lots of new business formation is taking place.
What I have done in the chart below is show the average revision to the initial payroll number for the 12 months of each calendar year, as well as the number of revisions that were negative, and by deduction positive. I also added the return for the S&P 500 to see if there was any relevant relationship between the data and market returns.
Mean revisionNegative monthsS&P 500 Total Return
2016-9,0003 out of 44.20%


You can see that prior to the last recession in 2008, the BLS had a tendency to under-report job creation as the economy was expanding. For example, in 2005 there were only three downward revisions to the payroll number between the initial estimate and the final revision two months later.
Including the nine upward revisions, the mean revision, or average, was an increase of 31,000 jobs per month for the year. As the rate of economic growth slowed in 2007, the number of negative monthly revisions increased and the size of the upward revisions began to shrink. When the economy began to contract in January 2008, the revisions were nearly all to the downside and included months when the economy lost jobs.

The recession lasted well into 2009, but by 2010 the recovery was underway, and the upward revisions were substantial (average of 40,000) and occurred nearly every month. The BLS was underestimating job creation at this point. The time period from 2008 - 2009 was obviously a major turning point.
Last year we saw seven negative revisions, which is more than any other year during this expansion. This was the early warning sign that I pointed out at the beginning of this year. We also saw a negative number on average for each month for the first time since 2008. What are the implications?
Based on the historical pattern, these negative revisions indicated that the economy was at another turning point. It did not mean that the US economy was on the verge of another recession. It did lead me to believe that the rate of economic growth in the US was slowing well below what the consensus expected it to be in 2016. The consensus was expecting growth of 2.5% at the beginning of the year for the first quarter of 2016, while I estimated it to be no more than 1%. The final estimate stands at 1.1%.
Friday's jobs report revealed that April's initial estimate of 160,000 jobs created was revised down by 16,000 to just 144,000 jobs. This means that for three out of the four months of this year that we have data we have seen downward revisions, and that the average revision has been a loss of 9,000 jobs. This shows that the labor market is continuing to weaken rather than strengthen as the consensus has concluded.
Despite expectations for a rebound in economic growth in the second half of this year to 2.5%, I am standing by my initial forecast for US economic growth of just 1% in 2016. The significance of the rate of US economic growth for investors is the implications it has for corporate revenue and earnings growth. The bullish consensus expects a strong rebound in corporate revenues and profits. This will not materialize unless there is a strong rebound in the rate of economic growth. The steady increase in the number of negative monthly revisions to the jobs data and the size of the negative revisions indicates that the rate of economic growth is not rebounding.

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