How Good Was The Payrolls Report Really?

A Lagging and Imprecise Indicator

As we have pointed out in our most recent update on manufacturing data, last Friday’s payrolls report will eventually be revised out of recognition (in previous months, a number of reports have at first been subject to an upward revision, only to be revised significantly downward again a month later. The final numbers will take still longer to arrive, up to a year if memory serves).

Hammer guy is included the non-farm payrolls report, Ms. Sickle isn’t …

Photo via magic-ays.com

This fact and the fact that employment is a lagging economic indicator makes it extremely odd that it is held to be the most important data point on the radar of the central planners at the Federal Reserve. However, the FOMC’s own statements indicate as much, and this policy focus is after all in line with the Fed’s bizarre mandate, which enjoins it to both keep price inflation low and employment high, by means of manipulating interest rates and the money supply.

Change in non-farm payrolls, monthly – total (black bars) and private sector payrolls (red bars). Last month the government was quite busy hiring – private sector employment actually grew at a slower pace than in the two downwardly revised previous months. Government drones are not creating wealth – they are consuming it

This is of course in keeping with the Keynesian philosophy – Keynes’ system can be called a “labor-based macro-economics”, as Roger Garrison points out in Time and Money. Primarily Keynes was concerned with fighting unemployment by means of inflation – i.e., by lowering the real wages of workers by pulling the wool over their eyes.

It is noteworthy that Keynes admitted that lowering unemployment required an adjustment in wage rates – he just didn’t want wage rates to be lowered in nominal terms, as he believed workers would be more inclined to accept a decrease in their real rather than in their nominal wages. This belief was thoroughly shattered in the 1960s and 1970s, when unions began to watch price indexes like hawks.

Since then, the calculation of price indexes has been changed beyond recognition too, with the result that the same price increases nowadays result in much smaller increases in CPI than was previously the case. This is achieved by methods that are quite questionable in many respects (such as the use of “owner-equivalent rent” instead of actual rents charged in the market, various basket weightings based on the “substitution principle” and of course “hedonic indexing”).