The Independent Market Observer

Interpreting the Employment Data

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on Apr 7, 2015 2:07:00 PM

and tagged In the News

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employment dataThe different reactions to Friday’s weak employment report got me thinking about how our underlying expectations can affect our decision-making processes—especially when it comes to investments.

My response to the employment report was to look at other employment data and decide the bad news was probably a blip. A friend of mine, on the other hand, took it as confirmation of all his worst fears. You can certainly see where each of us is coming from, in the larger sense.

Counteracting our built-in biases

How, then, do we evaluate our decision making, given that we’re operating from an underlying set of expectations? Can we separate the decision from the decision maker?

I often struggle with this issue, and I’ve come up with a few ways to deal with it:

1. Use consistent data sets. My Economic Risk Factor Update is a good example of this. I don’t change up the data each month in an effort to find results that support a certain conclusion; I use the same data sets every time. When those numbers change, so do my conclusions.

2. Consider the appropriate time frame. To select the data I would use in the risk factor update, I went back decades and looked at many different economic environments. Seeing an indicator work once is nice, but seeing it work over and over again, in very different situations, gives me a lot more confidence in its general applicability. When I use a number, it’s because I understand how it has acted in the past as well as how it’s acting now.

3. Try to prove yourself wrong. It’s all too easy to find evidence that supports what you want to think; it’s much harder, somehow, to find data that says you are wrong. As I’ve mentioned before, I’m somewhat infamous for asking “How does this blow up?” but I truly believe it’s one of the most important questions to ask yourself when making any decision.

4. See if it makes sense. The last piece of the puzzle is whether the data and the conclusion make sense on a fundamental basis. If the choice is between something that doesn’t make sense or some oddity in the data, then the data may well be skewed.

Back to the employment numbers . . .

Putting all of these pieces together, I conclude that what we're seeing is a steady recovery, with no signs of recession in the near future. While the short-term employment data is weak, the longer-term data is very strong. Other indicators besides job creation—the quit rate, hiring surveys, job openings—indicate continued strength in the labor market. Fundamentals—higher personal income and saving, a recovering housing market, renewed strength elsewhere in the world—support continued growth.

One bad data point doesn’t make a trend any more than a good one does. All in all, there are few confirming signs that the economy, and employment, have turned south that quickly. We’ve all become Depression babies, to some extent, and data is the key to keeping our deep expectations from distorting our conclusions.

And right now, the data says we remain on the right path.

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