Although...

One data point does not make a recession, today's payroll data were pretty poor. In addition to the headline reading of -4, the first negative month since August 2003, prior months were revised down. As the chart below illustrates, downward revisions have been the exception recently. And experience suggests that one generally only sees downward revisions in, surprisingly enough, a downturn.


So while Macro Man is not prepared to jettison his "no recession" view on the basis of one datapoint, particularly one as volatile as the NFP report, it does raise a warning flag.

More signficantly, it is likely to spur others into action. What should we expect? At first blush, Macro Man would look for the following:

* Weak equities: a liquidity salve is only effective if stocks are cheap and people do not expect a recession. We'll need lower prices and the passage of time before that occurs

* A weak dollar. The DXY is breaking critical levels, which should spur accounts that have remained on the sideline to give George Washington a whack. Macro Man buys €30 million EUR/USD at 1.3775.

* Underperforming EM. Growth scares are not good for emerging markets, particularly those with C/A deficits and/or a heavy reliance on the US. Mexico looks vulnerable.

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OldVet
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September 7, 2007 at 3:27 PM ×

Does Fed Govt still use a birth/death statistical adjustment to employment numbers? Always seemed an oddity to "adjust" real world data by a hypothetical percentage of population that was "supposed to be" employed.

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Macro Man
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September 7, 2007 at 3:47 PM ×

They do indeed still have it, and it added 120 k jobs, below the 6m trend. The whole things just illustrates the inherent difficulty of tracking US employment growth in quasi-real time, which begs the question of why they try...

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Manc Trader
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September 7, 2007 at 4:37 PM ×

Agree with you on the mexico call MM.

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Anonymous
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September 7, 2007 at 5:40 PM ×

Dear MM, Manc Trader,

If you are in agreement with Mexico, what about India, a succcessful EM so far but runs a considerable deficit (and has lot of youth in population too)

Its gonna sink ?

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Anonymous
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September 7, 2007 at 9:31 PM ×

"The labor force participation rate decreased to 65.8
percent in August, largely reflecting a decline in
participation among teens. The labor force participation
rate of teenagers declined by 1.5 percentage points to 39.7
percent. The household survey reference period fell
relatively late this August (covering the week from Sunday,
August 12 through Saturday, August 18) and, as a result, a
larger-than-usual number of teens had left the labor force
to return to school when surveyed. While the movement in
August may have been exaggerated by the timing of the survey
week, the labor force participation rate of teenagers had
been declining recently--from 43.4 percent in December 2006
to 41.2 percent in July 2007."


How has the late survey impacted numbers? Well they indicate it may exaggerate the decline in teen employment.

The unadjusted fall in teen workers in August is -910k the largest in a decade except 2000.

This translates to a seasonally adjusted fall of -275k the largest in a decade again apart from a blowout
-428K in 2001.

How about teen participation rates? Here the indicated potential error would lower the participation rate.

The unadjusted fall in teen participation July -August is -6.6% average for the decade.

But the adjusted fall is -1.5% the largest in a decade (double the next largest)apart from a blowout -2.5% in 2001.

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Anonymous
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September 8, 2007 at 12:33 AM ×

Has there been a Fed meeting in recent memory where forecasting the outcome correctly in quantitative terms, this close to the meeting, has been this uncertain?

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tmcgee
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September 8, 2007 at 2:23 AM ×

also given the sheer size of the labor force, it seems absurd to report the numbers in unites of 1,000. if they did so in % changes, i think this payrolls nonsense wouldn't exist.

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Macro Man
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September 8, 2007 at 7:29 AM ×

Anonymous # 1: I'd think that Indian markets could be in for a bit of a rough patch, given SENSEX valuation, though I'd imagine as a BRIC equity investors might give it a bit more of a chance than Mexico.

Anonymous #2: Interesting point, I hadn't seen that. And household employment was pretty weak in yesterday's report. Then again, it's been weak for a few months now. Certainly does nothing to dispel the foolhardiness of reporting this data in quasi-real time. Surely better to wait for a more complete sample, n'est-ce pas?

Anonymous # 3: In terms of the literal meeting outcome, you're probably looking at 2003. In terms of the guidance on future monetary policy, there was considerable uncertainty in May 2006; when the Fed suggested another rate hike was in the pipeline, markets took it rather badly...

Tmcgee: Absolutely. This data is bandied about as if it's the gospel, when it's more like measuring the distance to Proxima Centauri in kilometers: you can get a rough guide but it sure as shinola won't be exact.

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knuckledragger
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September 9, 2007 at 1:55 AM ×

i agree with the dollar negative sentiment. i'm not sure that i'm euro positive, though. some of the big problems, particularly with banks, libor, cp, etc. have been european. i think i'd prefer swissy, gold, or even yen. maybe i'm wrong, but i see parallel issues with europe. it must be all of those prop traders in london.

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Banker
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September 9, 2007 at 1:20 PM ×

Totally agreed. It doesn't look pretty at all.

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Anonymous
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September 9, 2007 at 5:18 PM ×

Why trade spot FX rather than forwards? Just curious.

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Macro Man
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September 9, 2007 at 5:30 PM ×

I do trade forwards. Whenever I do a currency trade, though, I usually give a spot reference and then roll it out to the forward date, which is how I trade in real life.

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