At Arm's Length - A Daily Market Commentary - Before the Bell Rings Financial Commentary about Money, Investing, and How It Affects the Average Investor

At Arm's Length: 06.02.04
Demanding a Recount

Is it possible to mislay or worse, miscount over two million jobs? Current conservative economic thinking believes that this is not only probable but likely. The blame is in the numbers and those numbers are important.

This Friday, the May jobs report is due. As I have mentioned before in this space, the first Friday of the month has now taken on an unhealthy importance as both the stock and bond markets wait for numbers that are both debatable and tradable. But which numbers mean the most?

Does the truth lie in the household survey or as John Tatum of the Tax Foundation prefers, the "civilian employment data", a survey conducted outside of the corporate world? Or does the correct answer await the investor in the payroll data accumulated from businesses? The later number by the way is much maligned for failing to include the entrepreneur, farm and government workers, new workers on the payroll and in the eyes of of those who strive for accuracy in their reports, people who hold more than one position aka part-time workers using two or more jobs to make ends meet.

This Friday's report is anticipated for two reasons. The first is expected growth in the job market will meet or exceed forecasts of 250,000 jobs added, in the process validating the President's enormous effort at creating jobs through economic dysfunction. Secondly, the significance of a lower number may mean that the Federal Reserve Board might not be as harsh when it comes to the expected rate increase at their June meeting. Consensus expects the rate to increase by one quarter point in June with a full point being added by year's end. But if those employment numbers lack the luster that is anticipated, the message that would send the markets could lead us to a much slower growth over the months leading up to the election.

The payroll number is now being labeled as the best short term number for spotting economic and job growth trends. According to the Fed Chairman Alan Greenspan, the number reflects known business peaks and valleys and those are predictable indicators of employment increases or decreases. The number is more volatile and subject to revisions but this often doesn't do much in the way of moving the actual employment rate.

Those aforementioned conservatives believe that the "mislaid or miscounted" employed can be found in the household survey, a measure many argue shows where this economic expansion is really coming from and by how much. If you look at post recession expansion alone, the numbers add up to the reason the economy has grown in spite of numbers that should have proven otherwise.

While increased productivity is a major component in the steadiness of the employment number, the household survey does not take into account all of the truth about those offsite jobs currently being miscounted. For instance, a laid off white collar worker who has turned to consultation as a way of putting food on the table may be counted numerous times if they work for numerous firms. The disparaged worker who has dropped from the official search for work similar to the job they once held would also be counted in the household survey as employed if they have received any form of income for any sort of work during the survey period.

How investors react either way will be the subject of continued debate over the coming months. The truth in the numbers will lie with the fixed income investor. These investors have absorbed three strong employment reports without much celebration even though this Friday's number looks equally strong. Even with last week's lackluster durable goods report and drop-off in new home sales, interest rates are going up and with it, the price of the 10-year Treasury note.

The average investor in fixed income has had to factor in far too much to make any real assessment of the short term future of the economy. The safe bet would be to believe that interest rates will go up with inflation, employment will continue to plague those miscounted millions while economists will persist in saying nothing much is wrong with the household number. On the other hand, businesses, who have increased inventories only begrudgingly still haven't committed to the belief that the recovery is anything more than a cost cutting salve of their bottom line.

The previous week's articles.

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