August 2017 Payroll Report

The numbers are in: huge revisions to the previous two months, and a meh of an initial estimate. Most analyses of this payroll report mention Hurricane Harvey and the potential impacts, which likely may have an influence in subsequent payroll updates. However, the greater concern should be how uncertainty about the future job market conditions influence the economy.

The graph below shows the history of payroll forecast standard errors in the WSJ economic forecasts. Not surprisingly uncertainty peaked during the recession, but the gradual decline, observed over the past two years, should be welcome news. The lower uncertainty is also striking given the volatile news/political cycle we have been in for the past 6 months. ​

A decrease in forecast uncertainty suggests that markets are comfortable with the direction of the economy. The forecast uncertainty during the recession was not because it was a recession, but rather that everyone was unprepared for its arrival and severity. Therefore, suggesting that low forecast uncertainty means a strong economy may not be wise.

Like much of the actual data coming in, forecasts are tepid. Essentially, forecasts are converging to their long-run means (or moving averages) because there is not enough information in the incoming data to give clear signals. Different models stress different variables, which is what typically gives the forecast uncertainty we saw during the recession. However, the general consensus we now observe implies that most forecasts are emphasizing the basic time-series aspects of the data.