Davidson on Employment “Analysis Paralysis”

• Posted by ToddSullivan
• on June 1st, 2012

“Davidson” submits:

This morning the May 2012 employment reports were released with an Establishment Survey +69,000 which many deemed very weak leading to forecasts of coming recession. Ignored entirely was a healthy +422,000 in Household Survey(HES). The chart below shows the HES vs. Auto&Lt Truck Sales (vehicle sales are reported throughout today). The attention paid to single month reports is an overly short term focus and leads to massive misinterpretation and Analysis Paralysis. “Analysis Paralysis” occurs when the data seems to go quickly from strongly positive to strongly negative and all recent investment decisions suddenly appear wrong-headed and now one does not know what one should do. The problem is not the data; the problem is short term data interpretation!

When one analyzes economic data, one cannot let any single data point determine the interpretation! The measurement of any economic trend inherently requires a minimum of 6mo of data to analyze a trend. Economic data is always statistical and subject to an error range. Economic data never shows a straight line. The HES which is my preferred employment measure has a potential variation of +/- 436,000 in any single month. One needs a minimum of ~4mos-6mos of results to begin to see an developing economic trend. Making a forecast using only the recent month’s report outside the context of the past ~6mos-12mos of data is grossly simplistic. The panic by so many today is not justified.

I prefer the HES as it covers all employed individuals including the self-employed which neither the Establishment Survey nor the ADP Employment Report do not. This month the HES reported an employment increase of +422,000. This is well within the trend beginning July 2011 of ~299,000 individuals being added to the employment rolls each month since. SEE CHART!

I remain and you should remain optimistic. Auto&Lt Truck Sales are being reported throughout today. PLEASE NOTE: Even though one may think that counting the sale of vehicles is a simple task, the actual month over month measure as shown in the chart is quite choppy. I will repeat this chart with the Seasonally Adjusted Annual Rate of vehicle sales next week once the data has been released by the St Louis Fed.

In spite of the panic by many today, I see only reasons to remain optimistic.

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