March 27, 2004

Statistics, Jobs, and the Equity Markets

READING THE FINANCE WIRES earlier this morning, we were quite amused at a story from the Reuters news agency which discussed the upcoming jobs report from the Federal Government. We found this story funny because it spoke of Wall Street's supposed hunger for meaningful jobs data that proved to "investors" that the economy was truly on the rebound. We do not exactly see things this way.

One reason is because the Feds' job number (the Current Employment Statistics survey) is widely recognized to be incomplete. That's not to say it is not valid -- only that it is limited. You see, that datum generally focuses on larger corporations -- as opposed to small businesses and self-employed folks which generally drive job growth during a recovery.

It is not only respected thinkers like Dean Esmay or Bill Hobbs who are pointing this out. We can assure you that any seasoned veteran in the finance world will tell you much the same thing. And the Feds themselves caution that one must take in both payroll and household employment surveys to get an accurate view of the economic picture. That same paper, interestingly, shows a slight difference between the surveys regarding the number of jobs created (or lost) in America from the period of March 2001 to Feb. 2004.

What's the difference, you ask? Oh, just 2.8 million. On the payroll survey, we have seen a net loss of 2.35 million jobs over that time frame. Yet on the household survey, we see a net gain of 449,000 jobs. If you tweak the latter survey to make it more like the former, you still see a net gain of 208,000 jobs. Our read on this is that perhaps the true number is somewhere in the middle of the 2.35 million loss and the 449,000 gain.

Now of course the payroll matter is the only one the market is concerned about, because the publicly traded firms are going to fall under its purview. If firms are hiring, that's generally a good sign for them. But we can't say this is a complete picture of the economy.

Besides, the whole premise of the article is iffy anyway. To say that "investors" are hungering for a good job number is not entirely accurate. An investor who holds for the long-term might certainly like it, but it is not going to drive his buying or selling decisions. On the other hand, speculators have undoubtedly been buying on rumor and will undoubtedly sell on the news when the jobs figure comes out next week. Our market moves the way it does not because of individual investors, but rather the institutional holders, hedge funds, and day-trading types who are all looking to make quick profits. But, then, we are not going to be convinced by a story that has this rather odd paragraph in it:

Of the 1,030 companies that have issued statements about their first-quarter results, 53 percent said their results would be better than forecast, 15 percent said they would be on target, and 54 percent said they would miss estimates, according to Thomson First Call.

Wow! That's 122 percent! Say, wait a minute.

N.B. Over at his excellent Web site, journalist Bill Hobbs has noted the astonishing growth in the formation of limited-liability corporations. These are corporate structures that basically give sole proprietors and partnerships the same legal safeguards as a corporation. Also the money is taxed just once.

Mr Hobbs argues that this accounts for a lot of previously unnoticed job growth. We personally would caution against reading too much into the growth of LLC structures, as this recent surge may A) in part be due to conversion from other structural forms, such as the sole proprietorship; and B) in part be due to the real-estate sector, where it is standard practice for a real-estate firm to create LLCs for each individual building it may own. That's just two examples. However, that said, we do think Mr Hobbs may be on to something with his work, and we wish him well as he pursues it.

UPDATE: Mr Kepple has pointed out that low hiring is not exactly bad for Wall Street, either. As hiring workers costs money, this has a direct impact on a corporation's bottom line. Low hiring also keeps interest rates low, which is a boon for Wall Street.

Posted by Benjamin Kepple at March 27, 2004 09:16 AM | TrackBack

Correct me if I'm wrong, but it isn't unusual for the markets to go down when employment goes up because it means costs of doing business are going up too. It's not unusual to see Wall Street react positively to higher unemployment, at least for a couple of days after the figures are released.

Posted by: Ara Rubyan at March 27, 2004 03:52 PM


The reason why you see the market react positivly at all when there is a lack of job growth is that it means that the Fed will no be as willing to raise the prime rate when the labor market is weak. For the most part, the speculators price in a certain ammount of jobs into the market and then everyone waits to see if that number is hit. If it is missed by a lot, it is not uncommon to see a rally because that would extend the time before we see a rate hike. If it is matched, the markets usually mulls and often times sells because the positive aspect of job growth is often not enough to drive the purchasing of future earnings. Jobs are good, but unless the new job creating numbers crush The Street's expections, it won't set off a firestorm of purchasing.

The market is a funny place.

Posted by: SaWb at March 27, 2004 07:15 PM


Couldn't have said it better myself.

Posted by: Benjamin Kepple at March 28, 2004 11:42 AM