Job stats are overhyped

What really got Wall Street is a tizzy about the economy was last month's sour employment reports, which showed a jump in the unemployment rate and job growth that had pretty much stalled. But wait a minute – the New Yorker's James Surowiecki points out that these statistics are notoriously ambiguous and not necessarily a reflection of what the economy is up to. They're hardly meaningless, as some renegade analysts would have you believe, but like any government statistic they're incomplete, often flawed, and always subject to revisions that could present a far different picture than the one first reported. Betting the farm on a couple of numbers - the unemployment rate and the number of payroll jobs added – is dangerous business.

If the results are imperfect, that’s because collecting up-to-date, accurate information about the U.S. economy, where millions of jobs are created and lost every year, is remarkably difficult. Imagine that you’re expected to track every job that has been created or lost this month. The new coffee shop that opened up in Baton Rouge, the guy who just got fired from your local auto-repair shop, and that kid who left his job to go to law school—you need to account for all of them. And you have to do this without much enforcement power or surveillance ability. Most respondents aren’t obliged to get back to you in a timely fashion—a major reason for the job-number revisions is that only two-thirds of surveyed businesses answer promptly—and there’s no monthly registry for new companies or for businesses that go under. Good luck.

[CUT]

The paradoxical truth about the jobs numbers is that they are much better than their critics say they are but nowhere near as good as investors believe them to be. As many studies have shown, people don’t have an intuitive understanding of things like margins of error and random sampling; they prefer to focus on a single number, even if it’s falsely precise, and so end up overemphasizing the report’s headline number. Investors are also subject to the so-called “salience bias”—high-profile information is weighted heavily even if it’s flawed. That’s why market moves in response to government reports are often surprisingly big—especially when, as now, they seem to substantiate investors’ worst fears.

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Mark Lacter
Mark Lacter created the LA Biz Observed blog in 2006. He posted until the day before his death on Nov. 13, 2013.
 
Mark Lacter, business writer and editor was 59
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