Adjustments for the New Normality

What's normal these days? You need to make your mind up about this today because as I write, equity markets across the globe are down two to three percent, and last Friday's US labour market figures are getting the blame. You know, the one that showed that 'the US economy had generated no new jobs in August'.

The question of normality arises because actually last Friday's job data showed nothing of the kind. What the US Department of Labor data showed was that the economy added 118,000 net new jobs in August. You can find the data, and the details here. To spare you the suspense, I can report there were healthy employment gains in construction (up 39k MoM), manufacturing (up 50k) ; and professional & business services (up 101k).

The problem is that this pattern of job growth was recorded before the seasonally adjustment process got to work. After it had completed its work, all net new the jobs disappeared from the data.

Now I don't want to impugn the US seasonal adjustment process unnecessarily, because it is trusted. That's not always the case: in some countries, seasonal adjustment regularly conjures up strange results, and sometimes fail the most basic tests of coherence. And in some emerging markets, the underlying structure of the economy is changing so quickly and radically that one shouldn't seasonally adjust at all. But in the US, neither is true.

But its readings now do and must intrinsically reflect a conviction that the historic data is the 'normal' against which today's data is judged and adjusted. Sometimes that doesn't seem right, and Friday's labour market data was one of those times. For August 2011 added 118K jobs;

• in August 2010 only 55K were added;
• in August 2009 125k were lost;
• in August 2008 116k were lost;
• in August 2007, 109k were added.

In other words, August 2011 was the strongest August for job creation since 2006.

The message, then, is this. If you think the US growth pattern is adjusting to a 'new normal' in which the urgent and successful desire by the private sector to adopt a lower financial-risk profile by deleveraging constrains the pattern of consumption and employment (see this piece), then August 2011 was a mildly encouraging month in the labour markets. If you expect a re-run of the post-1991 leverage-powered model of US economic growth, it was disappointing.

Either way, both adjusted and non-adjusted numbers agree, in August, non-farm payrolls were growing by 1.0% YoY – the fastest YoY rate since July 2007.