Friday, March 07, 2008

What keeps a forecaster up at night 

Writing the local forecast this week in part requires me to put blinders on to the national economic news for a few days. I find it better not to write in reaction to any signal in the RSS feed that day because, for all you know, it will be contradicted by another datum a few days later. Keep your head down, apply bum to chair, and write. (That's actually advice I heard given by James Buchanan many years ago, along with "don't get it right, get it written.")

Knowing the calendar was rapidly approaching on the jobs figure, we had all edits done last night about 9pm. Good thing, since this morning we got a surprise.
Nonfarm payroll employment edged down in February (-63,000), and the unemployment rate was essentially unchanged at 4.8 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Employment fell in manufacturing, construction, and retail trade.
The Street expectation was for a gain of 25,000 jobs -- weak, but still positive. The sectoral declines were to be expected. I think the decision on whether this is going to be a recession or not depends on what happens in retail trade, and the drop here dampens the news from yesterday that retail sales were better than expected. The possibility opens up now that the peak of the last expansion was in December or January. Professional and business services employment fell for the second straight month, indicating a decline in business activity across the board. Except for that sales number, bears ruled the week. Two investment banks are now calling for a recession.

A quick reminder to those who look at the unemployment rate decline as a ray of hope: it's a lagging indicator. Employment is coincident to the business cycle, so the reason for unemployment rates to lag can't be because of the numerator -- it has to be exits from the labor force. The massive drop in household employment of 255,000 in February may be an indicator that some smaller firms and self-employed workers also are getting washed out of the economy; that too has to be considered a very negative sign.

I recommend James Picerno's graph of the change in employment over the last five years, labeled "The Trend Is Not Your Friend." BLS data for how the unemployed got there says an increasing proportion of them are those who were separated from their jobs involuntarily without prospect of recall. That trend, too, is unwelcome.