The Most Reliable Jobs Data Looks Fine
Investors got a scare recently when the U.S. employment situation apparently took a big turn for the worse. In fact, it was a one-two punch in the face for markets.
The first punch, a classic left jab, was the rise in the unemployment rate. Then came the right cross, big downward revisions to previous estimates of jobs created.
This one-two punch created plenty of handwringing among talking-heads in financial media. But the problem is, those reports are never that reliable to begin with. There’s a much better way to gauge the employment situation. So, let’s compare and I’ll explain why the workforce is in better shape than people may think.
The first punch was two weeks ago, when the Bureau of Labor Statistics (BLS) showed the U.S. unemployment rate rising to 4.3% in its July jobs report.
That still seems low enough… but this result technically triggered the so-called “Sahm rule,” named after economist and former Fed member Claudia Sahm. If you’ve heard a lot about Sahm all of a sudden, it’s because her indicator signals the start of a recession when the three-month moving average of the unemployment rate rises by 0.5% or more from its previous one-year low.
That’s just what happened last month. And since 1970, the rule correctly signaled every recession – never a false alarm:
But maybe this time is different. That’s what Claudia Sahm herself had to say in Bloomberg:
“The U.S. is not in a recession, despite the indicator bearing my name saying that it is. The Sahm rule … joins a long list of economic tools skewed by the unusual disruptions of the past four and a half years.”
She goes on to say that the labor force is simply increasing due to immigration, so rising unemployment may be due to more workers, not more layoffs…triggering a false positive.
But then came the second gut-punch from the BLS last week, when its monthly payroll counts suffered a steep revision.
Revisions are common, but this one was a doozy. BLS says that its 2024 “benchmark” of job gains, which it tallies up in March then extrapolates to the whole year ahead, was overstated by nearly one million jobs. 818,000, to be precise!
Now, I’ve said this before, but it’s worth repeating: Don’t ever put too much faith in government statistical reports.
The monthly BLS report is just plain BS, for the most part. And Barron’s Daily said it best with this headline: Fed Rate Cuts Depend on Unreliable Data.
That’s because BLS bases its report on flawed survey results and “guesstimates,” and often heavily revises those reports after the fact, as we just saw in spades.
Now, I’m all in favor of the Fed finally following through on cutting interest rates, which is great for small-cap stocks in particular. As you can see in this latest study from Jason Bodner yesterday, that’s especially true one to two years after rate cuts when no recession is forthcoming:
Here at TradeSmith, a great source of small-cap stock ideas is Jason’s Quantum Edge Pro portfolio. You can learn all about the strategy at this link. And Jason agrees that “when rates have fallen in the past, it often overlapped with a recession in hopes to stimulate the economy. Right now, though, there is no recession.”
The truth is, the U.S. employment situation remains on very solid footing. You can best see this in more real-time metrics like unemployment claims data and especially private-sector data on layoffs, shown below:
The latest data shows that the real-time tally of job cuts is clearly trending lower this year. Also, real-time data on the number of layoffs and worker discharges is likewise declining.
If businesses were really trimming the workforce, it would show up in these real-time stats first, not in the backward-looking and heavily revised BLS numbers.
Mike Burnick’s Bottom Line: For my money, the U.S. employment picture looks just fine, with no imminent recession indicated. As my boss Keith Kaplan (our TradeSmith CEO) is fond of saying, “Trust the hard data when making your investment decisions.” And this recent unemployment-means-recession drama is a valuable lesson in which data you can trust and which you can’t.
Good investing,
Mike Burnick
Senior Analyst, TradeSmith
P.S. Rather than taking flawed government data as a sign to sell stocks…here is some data that can help you buy the right stocks now.
Jason Bodner has a quantitative approach I particularly like because it gauges the fundamentals and momentum of a stock – an approach all of us here at TradeSmith tend to favor – then combines that with a Big Money Index.
That way, we also make sure the stock is in favor on Wall Street, where that “big money” from financial institutions drives a lot of the action.
As part of his research on that topic, Jason just launched Project Greenlight. It’s all about how algorithms, including AI, are taking over 90% of all stock trades…and how to turn this into an advantage for you. Go here for Jason’s free video bulletin on Project Greenlight.