Employment Reports

The Current Employment Statistics (CES) survey, conducted by the Bureau of Labor Statistics (BLS), is a monthly survey of more than 400,000 business establishments. The CES program provides estimates on employment, hours, and earnings by industry detail for the Nation, States, and metropolitan areas. The CES is widely considered one of the most timely and accurate economic indicators published by the Federal Government. In fact this is one of the most followed indicators and can provide major swings in the market due to the weight that analysts place on these numbers.

The theory is that a strong employment report points to a growing and strengthening economy.  It is hard to argue otherwise as employment forms the basis of the economy and the consumer makes up two thirds of annual expenditure in the United States.  So to say that this indicator is not important is erroneous.  To rely completely on this number as gospel is also problematic due to the adjustments made by the births and deaths calculations.

The BLS attempts to adjust their numbers to reflect businesses that "die" and businesses that are "born".  Their argument has some merit as their monthly surveys lose companies that go out of business that month as they stop reporting.  Furthermore they are unable to find the new companies in a timely manner so they make an adjustment for these births and deaths.  It is also important to know that companies that report their numbers to the BLS do so voluntarily so there is also a good chance that a company that stops reporting may still be in business.  As an example the person who was reporting may have been laid off and no-one has picked up the reigns again. This will have the effect of skewing these adjustments but for this blog we will not dig too deeply into that side of the equation.

So how big are these adjustments and are they seasonal.  For March of this year the government reported an upbeat employment report of the creation of 216,000 jobs.  This exceeded projections and sent the markets into orbit.  Digging deeper though you will see that 54% of those jobs or 117,000 were concocted by the BLS's computer birth/death model.  Even more amusing (to me anyway) was that 21,000 new construction jobs were "created" and the next strongest category was the hospitality industry.  Amusing because in the same month the Commerce Department reported the largest monthly drop in US new housing starts since 1984, down 20.8% year over year.  I guess all the new companies are doing remodels!

These seasonal adjustments from the BLS will result in additional employment "strength" in April and May as the normal BLS adjustment is over 200,000 jobs added during those moths.  Based on the stronger than normal adjustment in March we could see even stronger adjustments in these months which would really add fuel to the fire.  That is why this week's weaker than expected initial claims numbers are even more surprising.  In fact the last two weeks reports are starting to show a trend toward a weakening labor market rather than (as the BLS numbers are indicating) a stronger employment market.

Despite all of this trickery the fact remains that the unemployment rate continues to form a massive drag on the economic recovery even after the trillions of dollars that have been thrown at the problem.  So while the market continues to run higher it is beginning to become more and more obvious that the "recovery" is more a function of stimulus money flooding into the market than a recovery on solid economic footing.  As such it is a very dangerous market and becoming more so with every rally.

If the market is being held aloft by stimulus money then how much longer can they keep this going?  On the other hand to be short this market is crazy as the Federal Reserve seems committed to printing money for the foreseeable future.  It is a conundrum and not a market to be trifled with.  If they are forced to stop printing the market will roll over but until then the shorts are going to be squeezed and that hurts.  Currently we are seeing some weakness in the market as quantitative "guessing" number two runs out of allotted cash in a month.  However, if another round of quantitative "guessing" is announced then we could continue to rally.  My guess is that the Federal Reserve will initially stop the printing presses to see if their policies have taken hold.  Once they see the drop in the stock market they will quickly realize that their policies have been in vain and they will be forced back into printing to salvage the one market that is "proving" that their policies are working.

My advice is to stay on the sidelines and keep your powder dry.  Once the Federal Reserve stimulus ends for good and the safety net is removed (and this will happen) the market will fall precipitously.  Chasing the market at this junction is not smart investing and will get you into trouble.  Rather seek to earn a modest rate of return and remove the downside risk.  One such investment is my Fixed Rate Deposits which provides you with a great rate of return and limited risk allowing you to wait for the dust to settle.