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Reading the Nonfarm Payroll Tea Leaves

Lifetime followers of the monthly nonfarm payroll report were more than a little amused by the Friday numbers, which could not have been more contradictory, conflicting, and confusing. The headline figure showed a gain of a paltry 36,000, yet the unemployment rate plunged 0.6% to 9.0%, one of the sharpest drops on record. In fact, the unemployment rate has fallen nearly 1% in two months, one of the sharpest drops on record.

Sifting through the tea leaves, these numbers reveal far more than meets the eye. Here are the high points:

*The unemployment rate dropped sharply because people are giving up on looking for work. Once the jobless exhaust their full 99 weeks of unemployment insurance, they disappear completely out of the system.

*Two successive “snowmageddons” possibly shrank employment by as much as 150,000. Construction and transportation were especially hard hit. Check out those amazing photos of cars buried by snow drifts in a Chicago traffic jam. They look like they are from a disaster movie. Those are all people not getting to work.

*The private sector gained jobs, while the public sector lost them. This is only the beginning of what I believe is 30 more years of government downsizing at the federal, state, and local levels.

*The 25 million jobs the US gave away to China and other emerging markets are never coming back, no matter how much the government spends. Unemployment is now structural and permanent. An entire generation of jobs was given away.

There is another big factor at work here that no one is discussing. I am not counted in the nonfarm payroll, as I work entirely in the cloud. Nor is anyone who works for me, be they in Washington, New Mexico, New York, or Timbuktu. We are all invisible to the Department of Labor. For all they know, we are all at home sitting on the sofa, watching TV while stuffing ourselves with bonbons, and picking the lint out of our navels.

What I’m getting at here is that the monthly nonfarm payroll is vastly underestimating the number of employed, and has been doing so for a very long time. It reminds me of another anomaly, when personal computers first came one the scene 30 years ago. The government originally treated them as consumer electronics sales, not as capital spending as it should have, similarly misleading us all.

The implication is that the economy is much stronger than we realize. The stock market correctly figured this out, eking out a 30 point gain on what were heralded as disappointing numbers. This is also how some 70% of companies have beaten conservative analyst forecasts in the current earnings season. All that is left to ask is how much of this undercover jobs boom is already priced into the market.

By. Mad Hedge Fund Trader




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