Stocks go up, stocks go down. Investors were treated to another wild intraday trading session as the market jumped higher at the open this morning before plunging several hours later. A weaker than expected November jobs report initially sent stocks higher, due to the effect it could potentially have on the Fed’s taper schedule.
Fed Chairman Jerome Powell indicated earlier in the week that the taper might accelerate in response to persistently high inflation. Bulls interpreted last month’s major jobs “miss” (revealed pre-market today) as something that could slow the taper instead.
Only 210,000 nonfarm payrolls were added in November vs. 573,000 expected. At face value, that’s a very weak report.
But the real jobs number was likely much higher last month. It’s just that it wasn’t reported accurately due to the Bureau of Labor Statistics’ (BLS) flawed seasonal adjustment model, which is used to screen out seasonal labor swings. For example, during months of uncharacteristically bad weather, the BLS will apply its seasonal adjustment model to construction-related payrolls to smooth out any sudden drops in hires.
The same type of adjustment is made to holiday-related jobs when the Christmas shopping season approaches. Over the years, November has typically seen 200,000 to 300,000 new hires as companies look for help to deal with the surge in holiday spending. The BLS’s seasonal adjustment will remove those jobs from the reporting to offset the spike in temporary employment, which can obscure the job market’s general health.
It’s an approach that makes sense. But during the Covid pandemic, the BLS’s model was thrown completely out of whack. And it’s only grown worse as the economic recovery has stalled.
Case in point, the BLS adjusted November’s jobs number down by a record-setting 568,000 payrolls. The average November adjustment since 2011 has been just 277,000 jobs by comparison.
Even in 2008, following the start of the Global Financial Crisis, the BLS adjusted down November’s jobs number by 389,000. Still far less than this morning’s report.
Without including the -568,000 job adjustment, roughly 778,000 payrolls were added last month. Had the BLS applied its average adjustment of -277,000 jobs, we’d be looking at a post-adjustment gain of 501,000 jobs, just 72,000 jobs away from the consensus estimate.
Wall Street either hasn’t realized this or is simply choosing to ignore it in the face of accelerating inflation.
“The disappointing 210,000 gain in non-farm payrolls in November suggests the labor market recovery was faltering even before the potential impact of the new Omicron variant, possibly as a result of the rising infection rates in the Northeast and Midwest,” explained Andrew Hunter, senior U.S. economist at Capital Economics.
“Nevertheless, the Fed will still push ahead with its plans to accelerate the pace of its [quantitative easing] taper at this month’s [Federal Open Market Committee] meeting.”
Analysts from investment management firm SouthBay were among the few who correctly identified the reason for last month’s major jobs “miss.”
They said the BLS’s massive adjustment took away from the fact that it was “far from being a weak November” for hiring. In reality, it was a relatively strong report despite missing estimates. Next month, these numbers will improve greatly following the BLS’s November revision.
And that, if anything, should only fan the hawkish flames as inflation continues to rise.
