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The November Employment Report: “Upon Further Review, The Play on the Field…”

Posted by Larry Doyle on November 13, 2010 7:01 AM |

Who would not admit that the ability to review plays in athletic contests has made for an overall better product? While continually questioning calls and plays would obviously detract from the pleasure of the game, I think most – if not all – fans truly appreciate the benefit of reviewing critically important plays so the outcome and integrity of the game are not compromised.

Can you imagine if we had the same ability to review the release of economic statistics?

Picture this. A key economic statistic is set to be released at 8:30am. Traders and investors the world over are hanging on the edge of their seats in anticipation. The number is released and commentators immediately hype the ‘headline’. But then, as those very commentators take their cameras to the floors of respective exchanges and trading floors, all of a sudden we witness a number of red flags thrown on the ‘field’ – that is, the trading floor – calling for a further review. In the hope of getting the call right, would our nation and our economy be better off if we allowed just such a process to occur? Why do I ask?

Let’s go back to Friday morning November 5th at 8:29am when the highly anticipated Employment Report was just about to be released by the Bureau of Labor Statistics. The seconds tick down. The anticipation builds. The palms of traders get sweaty. The heart rate increases. What will it be? Will this employment report – the single most highly anticipated monthly economic release – come out in line with expectation? Or will it surprise? The report was widely projected to show an increase of 60,000 jobs in the non-farm payroll. What happened? The actual release reflected a stable unemployment rate of 9.6% BUT an increase in jobs of 151,000!!!

Markets had moved sharply higher on Thursday. Was this ‘play’ leaked?

Again, utilizing our athletic analogy, the report generated the equivalent of ‘the crowd goes wild, the commentators gasp, and the the unexpected action on the field generates a frenzy of activity from the opposing team, the fans, and all in attendance.’

Then what? Can you imagine if market regulators, that is the referees, allowed for traders and investors to ‘challenge the play,’ that is, take the report upstairs for further review. What would have happened last Friday morning at 8:31am if we saw the red challenge flags come flying? What would we have learned? As Barron’s Alan Abelson highlighted in his commentary last Saturday, Is the Crowd Wrong on QE2?:

THE JOBS REPORT FOR OCTOBER was released by the Bureau of Labor Statistics on Friday, and at first blush was surprisingly strong, much stronger, indeed, than expected. Payrolls expanded by 151,000 and the two previous months’ were revised upward. But hold the hurrahs. The unemployment rate was stuck at 9.6%, and, toss in the underemployed and the rate remains at an elevated 17%.

Moreover, the household version of the employment picture was a real bummer, showing an employment drop of 330,000. That especially weird disparity between the household and the payroll reports made us do a double-take. Happily, the always astute Stephanie Pomboy of MacroMavens provided a quickie explanation:

“The seasonal bar which the payroll data must jump was (inexplicably and dramatically) lowered from prior Octobers.”

Thus in October 2009, the BLS set the bar at 870,000 jobs, similar to the 840,000 it anticipated in October 2008. This year, by contrast, it lowered the bar to 768,000. Mumbo, jumbo, payrolls presented “an upside surprise” of 100,000.

According to John Williams at Shadow Government Statistics, the BLS’ fiddling with the figures via what he calls “seasonal-factor games” actually created 200,000 phantom jobs last month. John cites such finagling as the reason his prediction of an October decline and a rise in the jobless rate was wrong. It also explains why seasonally adjusted payrolls were revised upward by 110,000 in September including 56,000 in August.

As we’ve observed before, those seasonal adjustments sure are magical: They can make it snow in the Sahara and be hot as blazes in the middle of winter in Siberia.

Wow!! Think that seasonal adjustment just happened? Think it was intentionally planted? Think it deserves further review? What happens to referees in athletic contests who ‘get the calls wrong’? They end up working games in Peoria.

Perhaps we might look to do the same with those charged with regulating our markets and their cronies in Washington who are involved with ‘fiddling with the figures.’

Navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

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