Belaboring Labor

In case you haven't heard, job growth in August was negative to the tune of 4,000 jobs. We say that because just about every news source in the country ran today's Household jobs report as the top story—it's been pretty tough to miss. (We find it curious the last several dozen consecutive positive jobs reports were never touted so highly by the press, only this lone negative entry. Go figure.) The report severely disappointed a consensus expectation for a 100,000 job expansion, and marked the first negative reading in the Household survey since summer 2003.

U.S. Payrolls Contract by 4,000 in August
By Greg Robb, MarketWatch

Job declines were largest by far in the manufacturing and construction areas, losing 46,000 and 22,000, respectively. This is being peddled as evidence a sagging housing market is negatively impacting the broader economy. The jobs report also increased market expectations for a rate cut at the Fed's upcoming meeting on September 18th.

Let's break down the employment issue in our hype-free MarketMinder style.

First, it's notable the unemployment rate remained unchanged at 4.6%—still near historic lows. That fact alone tells us fears surrounding this story are probably more hype than reality.

Another way to look at the issue is through the classic MarketMinder principle of scaling. As of the most recent tally, the US workforce is 153.5 million strong. Today's jobs report indicated a loss of 4,000 jobs. That constitutes a workforce contraction of…wait for it…0.00003, or three thousandths of a percent. When scaled properly, this feels like far too much hullabaloo over three thousandths of a percent.

Additionally, the notion that job losses tied to the sagging housing market have spread into the broader economy doesn't make sense. If manufacturing and construction had the heaviest losses, but net job losses were only 4,000, by definition that means jobs grew in other sectors. In other words, job contraction from housing is explicitly NOT spreading to other parts of the economy.

Skeptics will likely say, "That's fine and good, but this employment report clearly points to a significant economic slowdown, if not a recession." But that doesn't jibe with reality either. Employment statistics are nearly always a lagging economic indicator, not a leading one. Therefore, forecasting the economic future based on employment would be sort of like saying the ground was wet yesterday because it will rain tomorrow. That wouldn't make sense even to Yogi Berra. We think Treasury Secretary Paulson has the right view:

Paulson Says Drop in Jobs Not a Surprise, Sees Growth
By Peter Cook and John Brinsley, Bloomberg

Lastly, it's worth noting monthly job indicators are quite volatile. One month's decline is not necessarily indicative of a trend. It's true that job losses happen in turbulent economic times, but single-month payroll declines also occurred in August 1997, January 1996, and May 1995—all amid ongoing bull markets.

Ultimately, today's report is a minor event telling us very little about the economy's future. There's certainly no reason to ignore the otherwise very strong global economic fundamentals rolling in. This could very well be the catalyst for another down leg in the current bull market correction, which is a very common feature of corrections in general. Either way, this is no bear. Stay bullish.

Have a great weekend.