Unearned Optimism (Jobs Report Countdown)

Since January’s positive jobs report, it seems like the tenor of the economic debate has shifted slightly. Obama’s approval rating has risen and people are suddenly talking as if the recovery is again self-sustaining. In other words, the recovery is now being taken for granted. Greg Mankiw, using Intrade, noted that Obama’s chances of being reelected rose by 2 percentage points after the numbers were released. I thought it would be worth going over the reasons people are optimistic and why they might want to temper their expectations. The BLS will release February’s employment report this Friday, and it will also contain revisions to data from January and December. This will help further clarify the present economic situation.

1. Initial Claims
The 4-Week moving average of the seasonally adjusted initial claims data has drifted downward on a fairly consistent basis. However, there are some reasons to be cautious in interpreting this trend. First, there was a similar downward trend in the first quarter of last year before it came to an abrupt end in April/May (think Japan, oil prices, near-government shutdown). See the chart below. Oil prices have again risen this year, and it’s not clear what will happen with Europe, which is already in a recession (we will be lucky if that’s all it is). Second, the seasonal adjustment process may be cause for concern. FT Alphaville has a good set of charts and an explanation of the seasonal adjustment issues (via Nomura).

Seasonally Adjusted 4-Week Moving Average of Initial Claims.

2. Jobs
The news was good in January, with about 257,000 private sector jobs added, with robust growth in most industries, including manufacturing. We seem to have a consistent positive trend, but several of these recent data points are still subject to revision. Moreover, this has been a particularly warm winter in the United States, and there are doubts about the seasonal adjustment process as in the case of initial claims. Again, we had a similarly positive trend in early 2011. It’s important to see several months of robust employment reports before declaring victory. ADP, a private firm, released their estimates for private jobs added in February, and it looked robust, though it is not necessarily a great predictor of the BLS data in any given month, though they do trend together. Below is a comparison of the two series, as well as a look at how things were also looking good in early 2011.

3. Housing
I’m not sure there’s been any real progress on this front. I’ve heard that house prices are nearing a bottom, but again, I think it’s still premature to make that argument. Furthermore the different regions in the country are fairly diverse, and certain areas like Atlanta show no signs of a bottom yet. There was a large settlement between state attorney generals and several of the largest banks, and it’s possible some of this money could make a dent for some households. But compared to the scale of the problem, I’m fairly skeptical. More promising (h/t Calculated Risk) is encouraging news that homeowners who are underwater may get a chance to refinance. On the other hand, consumption has been flat for several months.

4. Oil/Motor Vehicle Sales
Oil prices have again risen considerably, getting ever closer to last year’s peak. Meanwhile, and somewhat surprisingly, auto sales have jumped in January and February to very high levels. This is very positive news and shows that maybe high oil prices are not quite as restrictive towards growth as they were last year. James Hamilton has some very clear thoughts on this subject.

We now wait impatiently for Friday’s job report. . .I will try and post my reaction on Friday.


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