Credit: John M. Bland, MBA
I have seen surprisingly little commentary about why the May non-farm payrolls data missed street estimates by a mile. Although I worked with a firm for a couple of decades, I was never involved in the data forecasting side of the business. Nevertheless, one thing that I learned there was that although the can be a lot of “noise” in monthly data, that fundamental economic trends are slow to change.
Keeping in mind the fact that basic trends change only slowly, I have looked at the recent pattern in monthly job creation over past eight months to see what I could about the recent trends that should be driving Fed policy decisions for short-term interest rates.
I have plotted in the chart below the monthly U.S. non-farm payroll data (red bars) and then to smooth out some of the “noise” in the data, added a three month moving average (blue line). I prefer the simplicity of this approach because it is very difficult to identify on an ongoing basis special factors that regularly distort the data. There are special factors, often offsetting, that even the pros miss. My objective is to identify basic trends which can be apparent in the moving average line.
As for the data on my chart, the first thing that strikes me going back to October 2015 is that out of seven observations that the monthly change in number of total jobs fell six times. Then when that change is smoothed, they fall every month once all the data are included in the moving average time frame. Extrapolating the latest three month trend in the monthly data, a reading of roughly +80K in May might have been expected. Subtract the well- known 35K is striking Verizon workers from that total and you get a “trend forecast” of abut 45K, depending on how you fit the line. I don’t recommend this as a forecasting technique, but it does suggest that the +38K was in line with the trend.
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In other words the May data was NOT a Black Swan event by any means. The June Jobs report will see the striking Verizon workers back in the workforce now that the walkout has ended, so don’t be surprised by an uptick in the data, but that would not be a trend move.
As for the Fed, it is possible its intentions to hike interest rates could be postponed once again if this trend persists. They missed their chance to start to “normalize” interest rates by a year or so when the data were improving.
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John M. Bland
co-founder
www.global-view.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
