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Recession, Employment and Make Believe


Bulls can ill afford to lose the long-standing impression that Americans can still find work.

A couple of years ago when someone dared to suggest to homebuilders or lenders that things certainly looked more than a little bubbly, the canned response was that "demographics" would sustain the housing boom out as far as the eye could see. No one ever bothered explaining even in vague terms what the magic "demographics" potion consisted of, perhaps because, as we now know, it did not exist.

A similar refrain is being heard today. When folks suggest that we are going into – or may already be in – a recession, the Pavlovian response is that there can't be a recession unless job creation falters.

So for those who scrunch their noses at the government data suggesting that there is no inflation, below is a look at employment data which if questioned slightly more than the notion of "demographics," might actually give us the heads-up that employment is indeed faltering.

We have often discussed in the 'Ville that the impact of the "Birth/Death Model" (BDM) on employment data should be scrutinized carefully because it tends to skew reality based on assumptions, rather than statistical observations. Without getting into the arcane details of it, the BDM tries to adjust for jobs created by businesses in the early stage of formation (and thus cannot be captured through surveys), and for jobs lost by businesses that dissolve, but whose dissolution is observed only with a lag.

Quoting straight from the Bureau of Labor Statistics website:

"The most significant potential drawback to this or any model-based approach is that time series modeling assumes a predictable continuation of historical patterns and relationships and therefore is likely to have some difficulty producing reliable estimates at economic turning points or during periods when there are sudden changes in trend."

So the question is, are we at a turning point?

Click to enlarge

We could beat this horse to death without coming to a firm conclusion. However, the above chart shows pretty clearly that if we back out the Birth/Death adjustments from the Private Non-Farm Payroll Data, the trend of the latter is looking mighty weak, with monthly average gains of 39k jobs over the last 17 months and "zero" average monthly gains for 2007.

Second, with yesterday's release of the weekly jobless claims, the trend in that series is also no longer Hoofy's friend.

Click to enlarge

I will concede that reaching broad conclusions about the economy and the markets from relatively rudimentary data series is a far bigger stretch than when we concluded that housing was in a never seen before mania. For the latter all we needed to do was look around with eyes willing to see. Nonetheless, with the legs of Hoofy's stool getting sawed off daily, our friendly bull can ill afford to lose the long-standing impression that Americans can still find work.

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