Fun Facts To Know and Tell About the Monthly Jobs ReportJuly 8, 2012 @ 10:53 AM EST
Before we get into the jobs report, let make one thing very clear; I am a bear from a big-picture point of view and the portfolios I run for both my clients and StateoftheMarkets.com are positioned that way. You see, I don't believe things in Europe are going to end well and the market acts similarly to how it did prior to 2008. But since my job is to perform for my subscribers and readers, I do have to pay close attention to what is important to the market. And make no mistake about it; the jobs report is important to the market each month.
But on that point, it is important to not get too carried away with these payroll figures released each month.
The TV talking heads and visiting "experts" talk about the report as if someone went out and physically counted all the people hired and fired in June to arrive at the number. They all speak as if it is an exact figure.
Here are some points to consider:
- First: The monthly employment situation report of changes in total payroll employment starts with a survey of about 141,000 firms and government agencies. This is obviously far less than
the total number of such that exist in the United States. Note - It's a survey!
- Second: The survey references a seven-day period in a given month, not the whole month. Note - Unusual events during the survey week could distort the reported figures.
- Third: Econometric modeling is applied. The most famous, or infamous, of these is commonly known as the "Birth/Death Model" which attempts to adjust for the creation
and demise of businesses.
- Fourth: each month a seasonal adjustment is applied in an attempt to smooth out the payroll changes which occur from one month to the next due to seasonal changes. For example, we all
understand that the retail sector hires large numbers of people for the Christmas season and then releases large numbers of employees during each year's first quarter. Seasonal adjustments are
applied in an attempt to smooth out these seasonal affects. Note - the seasonal adjustment for June was a minus 1,028,000. That's right; the seasonal adjustment was more than 12 times the
size of the reported monthly payroll changed.
- Fifth: adjustments to the reported number are made for months and benchmark revisions are made annually. For example, with today's report the figures for April were revised downward from +77,000 to +68,000 while May's original figure of +69,000 was changed to +77,000. May's figure will likely be changed again next month. Note - as these changes imply, perhaps we shouldn't get too excited about a consensus miss of 10,000 or so.
Finally, after all of the above, that's still not the whole story. On virtually all the various TV channels and radio stations you will hear a version of the following: "Employment for June increased by 80,000". Again, the talking heads are thus implying that this is the exact figure, rounded perhaps to the nearest thousand.
Well not quite!
A true full report would state that payrolls for June rose by 80,000 with a 90% confidence that the actual payroll change was within plus-or-minus 100,000 of that figure.
Put another way, the real change has an equal (9 out of 10) chance to have been a drop of 20,000 or a gain of as much as 180,000.
Oh, and there's a 10% chance it could be outside of the -20,000 to +180,000 range.
So maybe we shouldn't all really get too carried away with Friday's number. But then again, the market does react as if the reported figure is an absolute and that is the world in which we must play this game.
Have a good one...
Manager – PRO Trader Service
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