Thursday, August 16, 2012

What Gives With the Non Farm Payrolls Numbers?

Friday saw a very poor non-farm payrolls report and, equity markets had their worst day of the year. Whilst it is hard to argue against a payrolls report that saw the three month average gain go down to an anaemic 96k, it is worth pointing out how incongruent these numbers were with every other employment indicator out there. Unfortunately, the market doesn’t form its view of US employment from a multitude of sources. Instead, it just follows non-farm payrolls. This could be a mistake.

Not only were these numberrs out of line with other economic reports, I think, it is also running contrary to anecdotal evidence of increasing hiring among major firms. For example, US auto sales are very strong at the moment and Ford (NYSE: F) announced that it was going to produce an additional 40,000 cars in the summer by reducing its summer shut down at 6 plants.  Chrysler is also planning to increase production.

Turning to technology, cloud computing companies like Equinix (NASDAQ: EQIX) and Rackspace (NYSE: RAX) have also been ramping up capital expenditures and hiring activities. In fact, Rackspace was criticized by some for hiring too much in the last quarter. Amazon (NASDAQ: AMZN) has been aggressively hiring too, and lets recall that online business is more than just a virtual presence. It requires logistics, warehousing and shipping. Hiring appears to be broad based with AT & T (NYSE: T) , Wells Fargo and AIG all making significant hiring plans this year.

So why wasn't this seen in the non farm numbers?

Non-Farm Payrolls, the Best Measure?

The non-farm numbers certainly took the market by surprise and here is why. Firstly, the private component of the non-farm numbers was noticeably weaker than the ADP numbers were a few days earlier

Secondly, whilst the Total non-farm numbers were weak, with a gain of 69k, the household survey recorded an increase of 442k! In fact, according to the Household Survey the US has already added close to the entire number of hires for 2011!

Moreover, it looks like we are in one of those periods where the non farm payrolls numbers do not correlate with what survey’s, like the ISM, are reporting.


Most puzzling of all, the non farm payrolls recorded a 28k drop in construction employment when most evidence suggests  that US construction activity was picking up in May. Granted, it was an unusually mild winter in the US so a lot of activity and hiring was brought forward, but it’s hard to see how that accounts for a drop of that magnitude.

In addition, the Conference Board Employment Trend Index improved in April and here is what their Director said:
“We did not expect employment growth in December to February, averaging almost 250,000 a month, to continue. However, the disappointing job gain in April (115,000) is probably below the current trend and should pick up to about 150,000-175,000 jobs a month through the summer.”
It was a similar story from the National Federation of Independent Business (NFIB) where April saw a net 5% increase in small businesses hiring plans for the next three months. And finally, the American Staffing Association (ASA)  index reached a year high of 94 which is also the highest rate at this time of year since 2008.

So What Went Wrong?

I suspect the answer is not much. The mild weather probably brought forward hiring plans for the year and has front end loaded certain companies hiring plans. The average non farm payroll number for 2012 is around 164k against 153k for the whole of 2011.

I also suspect that a lot of small business hiring goes under the radar of the official surveys initially and that the Household Survey probably captures more small business hiring than the payrolls data does. In addition, with continued high levels of unemployment, it is likely that firms will find it easier to hire temporary staff rather than commit to full time staff. We are seeing that in the strength of the ASA numbers which indicate robust hiring.

On a more worrying note, it is undoubtedly true that firms will respond to uncertain macro economic events by holding back full time hiring. And we are not short of events to worry about at the moment. The growing realization that China and the other BRICs are facing slowing growth coupled with lingering uncertainty over Greece’s role in the Euro do seem to be creating negative sentiment towards investment in Europe and the US.

It is simply too important to ignore the consequences of these issues, but it is also too soon to write off the idea that the US will continue to generate employment and jobs this year.  I suspect these numbers will be revised upwards in due course. The non farm payroll data is a notoriously unreliable indicator of employment and is always subject to substantive revisions. 

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