Is the show run by dogma and is the phrase 'data dependency' just for show?
In some sense... to the Fed the jobs report means
almost nothing.
What I mean by that is that Fed officials are now speaking
to us much more in 'Fed Speak' about what they expect; The new reality is what their 'model' is
telling us - and the job report simply is NOT part of their model.
Models and tracking
So, for the jobs report to 'MEAN SOMETHING' it has to address a Fed official with a model and throw that member's model 'off
track'. Let's just say if you have ever seen bull-riding, staying on a bull is
about as hard as throwing a model off track. Models have huge standard errors
and given the vagaries of the data a lot of things can keep an economist saying
"my model is still on track," "my model is still on track,"
"my model is still on track"...when it isn't.
Models and Ideology
Models of course are imbued with the ideology of their maker.
So the model also represents that ideology and since it is believed by the model's creator it also represents the prevailing dogma of its estimator. While users will tell
you that their models change and are flexible for all practical purposes that
is not true. What you have is a continually re-estimated (and re-based
model) undergoing some very minor changes each time it is run while the main characteristics stay
in place. So incoming data really have to do something spectacular to put a
model's forecast in doubt. And, since so many of these Fed members use models
for their outlook... let's remember that models really never project a
recession ahead of time. They won't see it coming...
Models...and reality
I fact I think they call these things models because they
are like the women on the fashion runways. The way they can wear clothes is
just a way that real people simply can't. They wear this stuff on the runway
then sell it to normal people who wonder how come this looks like this on me?
The same can be said about economic data that is claimed to look so
consistently fine within a Fed official's model, but appears quite different to
the unemployed man-on-the-street. And this is not just a case of illusion...
So as we look at the employment report, what do we see
looking through the lenses of these sorts of models?
1. The unemployment rate is falling- check that fits
with my tightening model
2. Average hourly earnings rose and are up 2.5% Yr/Yr - Check
that fits with my labor market tightening inflation is on track Phillips curve
is not a dead model - It is not dead! What? You buried it? DIG IT UP!! NOT Dead!!
3. Jobs grew again in manufacturing and the gain was in the
top 10% of all changes in MFG jobs since jobs began to grow in this recovery. Check-
that fits with my, 'hey this manufacturing sector is not as bad as people say' model ...go chuck the ISM.
4. The labor force participation rate rose AND the
unemployment rate still dropped- Check Labor market is still really
strong. The Household reports knows...Rising participation rates are the manna from
heaven we have been waiting for. There is a God and he still likes economics...
5. Hours worked rose 0.4% in the month and that is real
solid/strong CHECK-a-roonie
6. The service sector slowed and its puny gain this month stands in the bottom 12% of all changes in private services jobs since jobs
began to grow in this recovery. Ok... Check so there is some slowing in
services but still enough job growth overall to drive the unemployment rate
lower. Still, consistent with my overall tightening model.
and we could go on...but I'll stop here
Models, jobs and context
Above you see how easy it is to keep your view and to see
confirmation in the monthly numbers. Some things fit more seamlessly than others...As for AHE, there is minimum wage
legislation that kicks in on the first of the year requiring another batch of
wage re-boots and that will bounce wages higher. Maybe the average hourly earnings gain has some regulatory fluff in it? Job growth was still centered
in low wage industries...but also construction and manufacturing this month
-and government employment fell. The job gains in MFG are hard to fathom, they are
not present in the ISM, but there they are there in non-farm jobs, at least for now. Bad seasonal
factors? Who can say? But SOMETHING here is inconsistent... And of
course there is a job growth slowdown in January even it it is not yet a
multi-month slowing...there is a weak MFG ISM there was a sharp pullback in the
Non MFG ISM. When we try to square the employment results with other similarly
topical reports we don't get full corroboration.
That should be another reason to not simply feed this gunk
into your model. Garbage in, garbage out as they say.
Wealth and wealth (poverty) effects
Moreover, the international signals are still weak. The
dollar has been pulled to and fro and it seems to have finally sided with the
notion that the rate hike in March may still be on. Oil is slipping, stocks fell (as of this writing anyway). The market remains a dynamic if
confused discounting mechanism. Ignore it or assert that it is disconnected from
the real economy at your own peril. There is a massive loss in wealth taking
place... IT IS REAL. As I wrote yesterday after the European Impressionist art auctions
tanked- that was real. There was less wealth supporting that market and it showed.
What's next? WHAT'S NEXT?? God help me for asking but is it...will it be real
estate? Please say NO!
Still in the eye of the storm and it is a - GLOBAL- not just
International storm
One problem we may have is being still in the eye of the
storm making the current data reports too-recently affected by events to have
fully reacted to them. Whatever is the case here, it is clear that there is a
lot of confusion. The Fed for now HAS NO ASSESSMENT of risk. We all are waiting for
the Yellen monetary policy testimonies (Formerly Humphrey-Hawkins) before Congress to see if the Fed's message
will change. For the reasons I express above I think it may not have changed by
much. The Fed language may be a bit more equivocal, but in all cases the Fed remains
accommodative to a rate hike in March. The Fed has been careful not to take any
action that might push that off. Perish the thought...
Dogma IS what DOGMA DOES
And that is why I continue to see Fed policy as based on
DOGMA. There is no reason to stick with a March rate hike. A hike has not been
promised. The economy is out of sorts. There may still be legacy strength in
the job market even as it cools...Jobs are a lagging, not a leading, variable. Challenger layoffs are up to the 10th highest
in December in the last 21 years after ranking much lower in earlier months. Jobless claims are drifting higher, the ISMs
both are weak and weakening stocks are volatile and lower overall. There are
lots of reason to be circumspect. What is so sacrosanct about getting four rate
hikes in this year? Really? Keeping that door open in the wake of this turmoil is
making the Fed look more and more like the show is run by dogma and that
statements of being data-dependent are just for show.
We will come to know the jobs report better as more months
reveal themselves. It is reasonable to think that there has been some shift.
The ISMs are saying so. January was ambiguous- something for everybody. That
does not mean we are not at a point of inflection or something more severe.
Cheers
I hope you find the above discussion useful. It is my
impression that it is more useful at this point than a PowerPoint full of
slides about trends that may be shifting.
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