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Solving A Pension Problem…With Leverage? That’s So 2007.
A recent story in Pensions & Investments Online suggested that “a number” of pension fund managers are considering leveraging their entire funds. This is right on the heels of a period in which many firms and funds lost huge amounts of money, partly because their leverage was pulled and they were forced to cover assets at bad prices. Memories are very short, or understanding is very poor.
According to the story, using borrowed money to invest as if they have 20% more assets than they actually do, “…would enable the board to reduce its equity exposure and increase allocations to lower-returning and lower-risk assets that offer greater diversification benefits while seeking to meet the board’s expected actuarial return.”
Is it just me, or does this seem like the real problem is that the board’s expected actuarial return is unreasonable? This is, in fact, the problem with most pensions today: in a world where long-term real rates are under 2% and inflation expectations are rising, returns are likely to be thin in all asset classes for a while. In such a case, it is reasonable for actuarial expected returns to decline. They don’t, because it is easy to monkey with that number to make your plan status look better than it is, but they should.
SWIB officials discovered that, like many pension funds, Wisconsin’s exposure to equity risk comprised 90% of the fund’s volatility. The pioneering change also would position the fund to endure a period of high inflation and low economic growth, a scenario of growing concern for many investors.
Here is my unsolicited advice to solve this problem, and I’ll charge less than their consultants: to cut equity risk, sell a bunch of your equities. To position the fund to endure a period of high inflation and low economic growth, buy TIPS. Ta-da! Oh, and you might want to talk to your board and see if you can get the actuarial returns to respond to actual market conditions, rather than take market positions to respond to ad-hoc actuarial return assumptions.
Seriously, people get paid for this?
Complacency Is Here, But For How Long?
December Retail Sales were weak, and that may be significant since December is an important month for said sales. However, November’s sales were revised up by a similar amount, which blunts the message somewhat. That is still a worse outcome than if it had happened in the opposite direction (November down, December up), but the volatility of the series being what it is I wouldn’t want to put a bunch of money on that significance.
Neither, it seemed, did people in the market. Stocks continued their new-year climb, albeit gently, and bonds rose a little as well. Treasuries did very well today, given the amount of supply that has recently come to market, but I suspect yields will be higher at month-end.
Except…that in saying such things I might be falling victim to the same complacency that is afflicting everyone else. Let us say that I suspect yields will be higher in the absence of something bad happening. But that makes the investment decision difficult, because a good probability of somewhat higher yields is countered by a low probability of significantly lower yields. With implied volatilities this low, it suggests to me that playing a further selloff with options (given the skew, probably selling bonds and buying protection with calls rather than buying puts themselves) may be the right play. I not in a position to invest this way, but I think that’s what I would do.
I was cautioned about complacency via a trading desk note from a sell-side bond shop (Deutsche), who reminded us that among the things to worry about we can include the following:
- China is taking steps to slow its economy.
- The European PIIGS are getting uglier and uglier.
- There are a number of US states facing a severe fiscal crisis, probably leading to more furloughs, job losses, and higher taxes.
I would say that of these three, #1 and #3 are pretty important medium-term concerns, which I wouldn’t necessarily expect to be incorporated into asset prices until one day when they abruptly are, while #2 contains the possibility of a shorter-term calamity. It is a good reminder that we continue to live in a dangerous world, and markets are not presently pricing in that danger. After all, the VIX is at 2.5-year lows, while prime jumbo mortgages are sporting record high delinquency rates. Which reminds me: to those three things above, we should add an old favorite, the continuing mortgage crisis – delinquencies and foreclosures haven’t stopped rising, yet!
One fear that is not likely to be realized, in the near term anyway, is the fear about how the extraordinary actions of global monetary authorities will be translated into inflation. There are lags involved, and at this point the lags are pointing downward. Tomorrow, the BLS releases the CPI, with the consensus estimate being for an 0.1% month-on-month rise in core inflation (1.8% year-on-year).
The dynamics of the number have been described in this space previously. Most of the index, ex-housing, is rising while the Shelter component continues to languish due to the declining cost of a substitute (owning, rather than renting, a home). But Shelter is more than a third of the core index, and is the dominant effect here.
I think the consensus estimates may be too high at a meager +0.1%. Last month, the year-on-year figure was unchanged at +1.7%; but the Median CPI produced by the Cleveland Fed fell to 1.3% from 1.5%. Some people consider the Median CPI to be a superior measure, since it isn’t influenced as much by outlier points as an average is; personally, this happens to interest me since the models I follow regularly are suggesting that Core CPI ought to be declining on a month-on-month basis rather than rising 0.1% as the consensus expects. Lags are coalescing into near-term downward pressure: last month, my preferred model said 1.7% year-on-year; this month and for the next 4 months it is forecasting +1.5%. If that is realized this month, it would say a -0.2% month-on-month print for Core CPI, rather than +0.1% as the consensus estimates, is to be expected. I think we’ll be more like 0.0% or -0.1%: missing by 0.3% from the consensus would be a huge miss and I think TIPS, which have been pricing increasingly high inflation expectations recently, would get slaughtered.
Now, the models I follow don’t strip out Shelter, and so the lags they are expecting are largely expressed in the weak Shelter subcomponent of CPI. But I will note that the “16% trimmed mean” CPI from the Cleveland Fed actually rose last month to 1.3% from 1.2%. This is consistent with what I am seeing in the dynamics of CPI: Shelter is weak, but lots of other components are starting to look perky.
By the way, headline inflation is expected +0.2%, but I barely look at that. It’s important for the valuation of TIPS, but policymakers will look at Core or one of the other 56 flavors of inflation.
Although they will barely register for me, there is a lot of other data due on Friday. The Empire Manufacturing Index is expected to come in at +12.00 from +2.55. I am skeptical, given the other weak prints recently. Industrial Production/Capacity Utilization (Consensus: +0.6%/71.8%) I actually think could surprise on the high side given the recent cold snap since utility output will have been higher than normal. University of Michigan Sentiment for December is expected to rise to 74.0 from 72.5.
If you look at the consensus guess on all of these numbers, you definitely can perceive the complacency among economists. They think the economy is springing back in typical post-recession fashion. I don’t, and until economists start ratcheting back their forecasts I think there’s more risk of the data missing on the low side.
At some point – and history tells us that it is very difficult to identify that point – investors will abruptly realize that the script they have been reading from, which calls for a strong recovery to follow a deep recession (enter strong recovery, stage right), isn’t working out and they will need to look for a different script. Unfortunately, all alternative scripts imply a lower rate of growth and higher risk (aka discount factors) to be applied to asset flows, and therefore a lower price for equity. If this adjustment happens gradually, we may have a gentle retracement and retrenchment of recent stock market gains. If it happens abruptly, we could have a sharp break in prices.
I don’t have any idea which outcome is more likely, but I am on guard. It is harder to be mugged when you’re looking for it.
The market is closed on Monday for Martin Luther King, Jr. Day. I will probably publish something over the weekend following up on the CPI print, but no promises.
Predicting Crises – First, You Have To Try
Sometimes, I am hard to work with. Now, there are probably plenty of people who would retort, “sometimes?!?” but I would like to make it known that I am only particularly difficult to work with when I am waiting for a macro to run or for some other reason turn my attention to what’s on CNBC.
That’s when I generally start shouting the chyrons that Tout TV has on-screen (a chyron is the little caption that describes “breaking news” or the name of the speaker, or somesuch), like “Intel: Time to Buy?” or “Which Stocks Are Poised To Rocket” or “Stock Market: Should You Go Long, Longer, or Longerer?” (I made that last one up). I know it must break my neighbors’ concentration – and by “neighbors” I mean the people in adjacent buildings – but I really can’t help myself. It just seems like the channel is incapable of considering the possibility that there may actually be a time when stocks should not constitute 125% of your portfolio.
If brought to justice, I am sure the people who guide the programming on CNBC would say “well, research* shows that stocks are the best investment for the long run,” thus relying on mythology to justify their existence. Of course, we can’t hold them guilty for that. After all, many financial market participants have been guilty of the very same thing in the not-too-distant past. Why, I saw today that JP Morgan Jamie Dimon said “we just missed that housing prices don’t go up forever.” Wow, gee, how could we have known? Who would have thought that prices don’t go up forever? We were just as surprised as the next guy.
Of course, the entire Establishment has been in damage control since Day 1 of the crisis, but what shocks and appalls me is the sheer number of enablers. Even some people who seem to be onto a good lead tend pull their punches. I read a piece recently by economic researchers at the San Francisco Fed entitled “Predicting Crises, Part I: Do Coming Crises Cast Their Shadows Before?” Now, the economic research staff at the various Federal Reserve Banks are generally pretty independent – not completely, of course, but they are pretty far removed from the nuts and bolts of policymaking. It isn’t a place for whistleblowers, but this author concluded that there is “evidence suggesting that simple indicators based on asset market developments can provide early warnings about potentially dangerous financial imbalances.”
That sounds like a clear departure from all the whining from the actual policymakers as well as people like Dimon, whose main defense seems to be “hey, Greenspan didn’t see it. Bernanke didn’t see it. How were we supposed to see it?” But this lightweight paper only hints at the notion that the crisis could have been predicted (that being said, one of their primary sources looks to be worth reading but I haven’t gotten to it yet since I’ve been busy yelling at CNBC).
Hey, here’s a very simple argument that is pretty persuasive about the question of whether crises and bubbles can be predicted. The null hypothesis here is that they cannot be identified a priori, but…at least one economist, who was already well-known prior to these crises, did in fact identify the last two bubbles before they burst. What are the odds that, out of the universe of already-known analysts, economists, and policymakers, anyone can predict both of them by pure chance? We’re not talking about a million monkeys pounding on typewriters here (only 535, I believe is the count) – it’s a fairly small universe of people. Out of 600 million nutjobs in the general population of the western world, some people would have gotten that right by chance. But this isn’t a nutjob. It’s someone who actually did analysis, and got the answer right. Twice.
Doesn’t that suggest that the null hypothesis is on shaky ground? It seems reasonable to consider Dr. Shiller a refutation of that hypothesis.
Less work should be done on defending the notion of efficient capital markets (kids, it’s still important to learn about the EMH in the same way that it’s important to learn arithmetic even though you have calculators). More work should be done on identifying unstable conditions and figuring out how to defuse them. I have my thoughts, but then I’m just one of those nutjobs. So far.
Tomorrow we finally get some decently useful economic data, so CNBC can figure out how to spin Retail Sales (Consensus: +0.5%, +0.3% ex-auto) into a tale that commands retail investors to buy eBay. While Retail Sales is a pretty volatile number, the December figure really is worth paying extra attention to since December sales constitute a disproportionately large portion of the year’s retail sales. I am more interested in Friday’s CPI data, because I am an inflation guy (inflation_guy on Twitter, actually), but I will be interested to see if core December sales really did expand despite the dour consumer mood.
* “research” here means “I haven’t read the research, and I haven’t spent any time trying, but someone told me stocks always outperform in the long run.”
When Government Is Like A Box Of Chocolates…
I don’t know if it was Reagan who said it first, but he was the first person I am aware of who said that government’s approach to a problem is often “If it moves, tax it; if it keeps moving, regulate it; if it stops moving, subsidize it.”
This appears to be exactly what has happened in a number of cases recently, but we have discovered that the cycle doesn’t stop there but actually repeats. Financial companies have long been taxed and extensively regulated, but despite all of that earnest oversight, it turned out to be necessary to move to the “subsidization” round. Now, after extensive mollycoddling to rejuvenate the industry, the Obama Administration wants to tax the surviving and thriving companies – including those who have paid back TARP funds by issuing stock and borrowing heavily – to reimburse the country for all those recipients who are highly unlikely to ever repay the government (AIG, GM, etc).
The TARP recipients may not have taken the money originally if they knew that part of the terms included having to pay back not just their own loans, but everybody’s loans. Although, come to think of it, most of the TARP banks had no choice as the Treasury and Fed forced them to take money (to avoid “tainting” the ones who really did need it). The reasoning appears to be that some nebulous banking collective is what benefited from TARP, not just the specific banks in question, and now we must take “from each according to their needs,” as someone once said.
To boot, Vermont Congressman Peter Welch proposed today to copy the 50% tax on bonuses that the British and French are levying. So, rather than accepting the exodus of talent from those countries to our shores, we figure we’ll squeeze our guys too. Clever.
What is really damaging in all this, though, are not the policies in question but the increasing tendency for stochastic/spastic changes in rules.
I recently read a very good book, The Forgotten Man: A New History of the Great Depression
This is, of course, what happens when smart people are trying to steer the economy instead of letting the economy steer itself. There must be lots of mid-course corrections because no matter how smart Obama, Geithner, Bernanke, and friends are, they aren’t smart enough to understand the totality of the economy in all its dynamism. When they move this lever here, they realize that it creates a need to turn that knob over there, which further necessitates a button-push way over there. The economy naturally handles many of these things if left along, because businesses have financial incentives (if allowed to keep their gains for their shareholders) to handle those levers, knobs, and buttons that are their own specialty.
Now, whenever I think about volatility in any form I can’t help but think of options, as readers of my book will already know first-hand. One of the best non-financial uses of options theory I can remember hearing was when an old boss of mine, who was otherwise an ogre, explained why New York Knicks guard John Starks was a good player for a bad team but a bad player for a good team. Starks was a streak shooter, which is another way of saying his output in terms of points-per-shot was highly volatile. When he was on, he lit up the scoreboard; when he was off, as Knicks fans recollect to their sorrow, he could drag a team down in Game 7 of the NBA Finals. My former boss observed that on a bad team, this volatility was good because a “win” was an out-of-the-money option and an increase in volatility increases the delta of such an option. In other words, if you were unlikely to win anyway then Starks’ cold periods wouldn’t hurt, but his hot periods would cause you to win some games you wouldn’t have otherwise. However, on a good team that expected to win, a “win” was an in-the-money option and an increase in volatility decreases the delta. So the hot hand doesn’t often help (you were likely to win anyway), but the manos de hielo sometimes sinks you.
This is the key point to be drawn from options theory: if an option is in the money, then an increase in volatility lowers the delta (and the delta can be thought of roughly as the probability of winning); if the option is out of the money, then an increase in volatility raises the delta.
The extension of the option analogy to business may be clear. If the economy is collapsing (I mean, really collapsing), then trying a whole mess of things to stop the implosion of the financial system is arguably warranted, because survival is an out-of-the-money option. But in most cases, the financial/economic system works pretty well, and adding a lot of regulatory volatility to the mix runs the risk of taking that in-the-money option out of the money!
It occurs to me that I am make a presumption here, and that is that the financial/economic system works pretty well if left alone. That laissez-faire philosophy is typical of Republican (old style) or Libertarian thought – the system naturally works. But there are plenty of people who believe that the system doesn’t work if left alone; for example, it doesn’t distribute income “properly.” I suppose if you don’t grant my presumption, then it doesn’t necessarily follow that adding regulatory volatility is bad because even the economy of the mid-80s to mid-90s wasn’t doing what you wanted it to. If a rising tide does not in fact lift all boats, then it is necessary to erect boat lifts.
GM Is Trying To Figure Out How To Be Bigger
No, seriously! The carmaker whose biggest problem has been, for at least a decade or two, that it is too big to profitably compete is trying to figure out how to make more cars. Article in Business Week is here. This is what happens when bailouts keep dying companies alive.
Empty Words, Full of Baloney
So far, the Treasury has not had much trouble moving the mountains of supply it has needed to. Today’s $10bln TIPS auction came right on the screws, actually slightly through the screens at 1pm. This shouldn’t be very surprising; of all the securities that Treasury is issuing, the ones linked to inflation ought to be the most-attractive especially since they aren’t exactly flooding the place with them.
The Wall Street Journal sought to suggest otherwise today, running an article entitled “U.S., In Nod To Creditors, Is Adding TIPS Issues.” According to the article, “by increasing the amount of TIPS outstanding, the U.S. government boosts its credibility as an inflation fighter. ” TIPS issuance is projected to rise by some 40% this year which, as I noted a couple of weeks back (“What Was the TIPSing Point?“) isn’t anything close to the wholesale changes that have been made in the nominal Treasury calendar. When $10bln 10y TIPS can be released into the market with not a ripple, then a government that is trying to raise and roll trillions of dollars per year of debt might reasonably consider whether they can auction a few more. But increasing issuance 40% in these circumstances doesn’t exactly signal “inflation fighter!” to me.
But words, of course, mean less and less every day (which is why I have to spew more and more of them!). According to a Bloomberg story today, President Obama has “vowed to halve” the $1.4trillion deficit of last year. Great!…but almost trivially easy. If you just avoid spending the $1trillion in stimulus money then, even with lower receipts, you ought to make good on that promise pretty easily. It is so not nice to take advantage of people who can’t do math.
Speaking of “not nice,” I think Chairman Bernanke needs to get the phone number of Greenspan’s P.R. director. Not one but two articles this weekend were aimed at Generous Ben. In Barron’s, economic columnist Gene Epstein took the Fed chief to task for citing a study in support of his position that did, in fact, come to rather the opposite conclusion from his own. And, in what would be considered “piling on” if this were not the blood sport of finance, Dr. John B. “Rule” Taylor penned an op-ed piece “The Fed and the Crisis: A Reply to Ben Bernanke” in the Journal. In addition to echoing Epstein’s point about a primary source, Taylor also took issue with Bernanke’s re-writing of the Taylor Rule ex-post to use forecast inflation rather than actual inflation and pointed out that even with blue chip forecasts other than Ben’s own, the Fed arguably kept rates too low for too long and helped contribute to the housing bubble.
I haven’t seen a hit like that since Donovan McNabb’s arm was karate-chopped by DeMarcus Ware, although come to think of it that was pretty recent.
Look, low rates contributed to the housing boom, and Bernanke is wrong to try and steer attention away from that fact. It’s crazy to suggest that low rates didn’t increase the investment value of the home. But personally, in retrospect I don’t think the Fed had a real choice, because as I’ve been arguing recently there was a real chance that the non-housing economy was slipping into deflation and the Fed couldn’t be pricking bubbles in that circumstance (which is one reason why some inflation is a good thing for policymakers). Of course, the Fed also wasn’t arguing for using other policy levers to restrain housing, so as the nation’s economist reserve (the Fed hires more econ Ph.Ds than anyone in the country) they’re not entirely free from guilt. I am just not sure that laying the culpability for the housing bubble entirely at the Fed’s feet is fair since I can’t say that it is immediately obvious that a broad deflation and very high real rates over which they had no control (which is what they would have had if they had tightened then) would have produced a better outcome.
However, I am sure that Congress and others who should have exercised adult supervision are more than happy to blame Ben. How weird it feels to be defending him, even a little.
“Want A Job Now” Still Hasn’t Turned
In early December I wrote about an indicator I have been watching to see when a bona fide turn in the underlying employment situation has occurred. It measures the number of people who are not in the labor force but who nonetheless want a job. This is sort of a “supply overhang” in the labor market, and that overhang is still causing a hangover. As the chart below (Source: Bureau of Labor Statistics) shows, the industrial reserve army of the unemployed is still growing.
Not In Labor Force, Want A Job Now
This will keep the Unemployment Rate elevated in the same way that the supply overhang in housing will keep prices from rising very much: as the situation starts to improve, this shadow supply will come on the market, joining the labor force initially as unemployed people.
Labor is a lagging indicator, we have been told a hundred times. But the Fed cares about the Unemployment Rate – so this continues to push off the date of first tightening.
Westpac Wins Closest-to-the-Pin
James Shugg of Westpac Banking Co was the closest, at -80k estimate, to the actual Payrolls number of -85k (among surveyed economists at Bloomberg). It would be neat if firms had an “Employment pool” like traders and salespeople at many investment firms do: each firm puts up $1k and the winning economist gets the pool. Although, come to think of it, that wouldn’t work…the strategy to maximize your expected winnings is not necessarily the same strategy to minimize your forecast variance. It would be fun though.
The More They Talk, The Less They Say
Perhaps the entire period of Fed ‘glasnost’, in which they did their best to telegraph everything they were going to do for the next six months, was setting up for this. As the new year dawns, it seems that we are hearing more and more salvos from Fed speakers suggesting they could hike rates at any time and they know they will someday need to do so. Maybe they think we will take them seriously. But no one in their right mind believes that the FOMC would do anything significant with Unemployment around 10%.
Indeed, it seems to me that all the talk about the necessity to eventually hike rates is like Cleavon Little holding a gun to his own head in “Blazing Saddles” and telling everyone to stay back “or the n—– gets it!” Hiking rates at this point would be potentially catastrophic without having any meaningful redeeming effect to warrant the risk. This isn’t to say that it is impossible to make a case to move rates away from zero; merely that it would be a foolhardy move on a risk-reward basis. Not, mind you, that such considerations have stopped this Fed.
However, consider how silly it it is to publicly fret on one hand about the potential impact on interest rates when the Fed’s mortgage purchase plan ends while on the other hand threatening to hike rates directly. I suspect they are just trying to talk the curve flatter somehow. They are likely concerned about the continued frothiness of forward inflation indicators; 5y5y forward inflation, as measured (correctly) by CPI swaps, is at 3.28%. That’s not as high as it was last year, but is considerably higher than it was in the summer of 2008 when the Fed was frightened by the inflation outlook. And, as noted yesterday, the Fed seems to believe very strongly in the importance of keeping inflation expectations “anchored.”
One of the Fed's favorite inflation indicators continues to look jumpy.
So today’s blather was provided by Kansas City Fed President Hoenig, who suggested that “near-zero rates may impede financial market recovery” (according to Bloomberg).
Now, that’s a crazy statement. Raise rates, and money will flow to money market funds and out of bonds and equities where money is lent for longer terms. It will flow into bank accounts rather than being spent. It will flow away from term lending at banks (it has already done so, even with near-zero rates) into government securities. It might help repair the personal balance sheets of “passbook savers” a tiny bit, but by driving up mortgage rates and helping to drive down home prices and equity prices that effect would be completely overwhelmed. All of this is bad for economic recovery, and that cannot help financial market recovery! The only possible way I can see that low rates might impede recovery in the financial markets is if somehow low rates are impairing confidence, but that’s nuts.
Hoenig did say that while the Fed should eventually lift nominal rates to the neighborhood of 4%, or roughly 2% real rates, and that balanced policy should occur “sooner rather than later” because the “recovery is gaining momentum,” it will still be “some time” before policy actually becomes more balanced.
As if to underscore the threat – and make no mistake, there is an implied threat here that banks should release some of their mark-to-market assets like Treasuries and do some more lending – the Fed released a joint communique from a flock of financial regulators including themselves, the FDIC, OTS, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Federal Financial Institutions Examination Council State Liaison Committee. It read in part:
The Federal Reserve Thursday released an advisory reminding depository institutions of supervisory expectations for sound practices in managing interest rate risk. This advisory, adopted along with the other financial regulators, reiterates the importance of effective corporate governance, policies and procedures, risk measuring and monitoring systems, stress testing, and internal controls related to the interest rate risk exposures of depository institutions…
…The financial regulators remind depository institutions that an effective interest rate risk-management system does not involve only the identification and measurement of interest rate risk, but also addresses appropriate actions to control this risk. If an institution determines that its core earnings and capital are insufficient to support its level of interest rate risk, it should take steps to mitigate its exposure, increase its capital, or both.
Now, I don’t think this is telling bankers anything they don’t already know. I’ll go further: I don’t think these regulators can tell bankers anything they don’t already know about interest rate risk control. (And that is the big problem, incidentally, with the way the regulatory environment is developing. Regulators – and even worse, Congressmen – judge risk after the fact, as in “did you lose money?” Of course, risk control is conducted a priori, and can’t be evaluated merely on the basis of the one result that actually occurred from the universe of possible results. But there’s no way to explain that, using only monosyllabic words, to a Congressional committee.)
But what this release does do is create a bit of risk that a selloff on a strong number tomorrow could be more extensive than it would otherwise be (who is going to go out on a limb and be long after strong data after that lecture on risk?!). Now, I am on record as saying I think the Employment number is somewhat more likely to be weaker than the forecasts are calling for, but now I think the trading risks are more balanced: better chance of a rally, but a selloff might be steeper. Tough call.
ADP And The Prospects For A Payrolls Surprise
The ADP figures are the best indicator we have when it comes to predicting Payrolls; unfortunately it isn’t a great indicator. Moreover, Friday brings the December data, which along with January are really difficult months to seasonally adjust so “anything goes.” With those caveats, I am very interested in the fact that ADP (which measures private-sector jobs from companies who use ADP for payrolls…tending toward larger companies) is running so far behind Non-Farm these days. Over the last 12 months, as the following chart shows, Non-Farm Payrolls have outpaced ADP by what is historically a fairly large amount.
NFP has been running very far ahead of ADP
At some level that is not completely surprising, since we would expect that government (not covered by ADP) has been a prime source of jobs over the last year. Oddly, though, that’s not the case. According to Bloomberg, total government payrolls actually declined from Nov 2008 to Nov 2009, by 42,000 employees (from 22.543mm down to a mere 22.501mm local, state, and federal employees are working hard for you…one in every six working stiffs toils for the government).
Thus the lagging ADP either means that the jobs are all being added by smaller companies or, anyway, non-ADP customers…which seems unlikely, since there is no credit available for small businesses at the moment…or this is a statistical artifact, perhaps having to do with the way the series is smoothed on the ADP side or collected and reported on the Labor Department side.
This makes me concerned about the consensus for December Payrolls, which is for a flat report. It looks like economists are just projecting the NFP trend, but that would represent (after today’s figure) an 84k outperformance of ADP; which would bring the 12-month total to +647k.
If the 12-month total instead remained flat at +516k, then NFP would be printing -131k.
There may well be other systematic things going on; as I remind people repeatedly there has never been a period like this in the data so nothing you extract from the data can carry very high confidence. But I would think this month that there is a greater chance for a downside surprise in NFP than an upside surprise.
