Friday, June 02, 2006

New jobs report disappoints, but really isn't that bad

The market is swooning so far today and most people are blaming the bad jobs report. If you've been reading here you were probably expecting this bad report, but how bad is it really?

The payroll survey showed 75,000 jobs added in May as opposed to an expectation (according to the survey) of 170,000.

But the household unemployment survey (the source of the often quoted unemployment rate) fell to 4.6% from 4.7% -- a significant improvement. Projections had not expected a change in this number.

Why are these two numbers different? The payroll survey works from the payroll tax information supplied by employers, while the household survey is a literal phone-survey of households asking if they are employed or not and/or looking for work. People who work for themselves (like yours truly, the Finance Wonk) don't show up on the payroll survey, so that number is always an undercount. The household survey is a sort of an undercount too, in that if someone isn't "looking for work" they don't count as unemployed, but it does catch people who are in a non-employee status. As the "homesourcing" trend continues and people start working in less traditional roles we would expect to see the payroll numbers drift lower while the unemployment numbers stay steady or decrease.

In short I think that we are seeing a continuing demographic shift that is not cause for alarm. The decreasing unemployment rate shows a lot of strength, and the lower number of payroll hires is not enough so far to signal an economic shift.

Another number out today in the same report was average wage gains. The increase for the month was 0.1% (versus a forecast of 0.3%) but after an April increase of 0.6% we had to see a lower number. As long as the average is above 3.8% per year or 0.3% per month (which it is) I think we're fine. I did the math on the 0.3% number and it would be enough payroll gain to offset the lack of home refinancing while supporting increased consumer spending, although increasing mortgage payments will take a big chunk and slow down growth.

I don't think this report will sink us, but the market will still be sensitive to bad news for fundamental reasons. Forecast: stormy ahead.
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