Measuring The Statistical Insignificance Of The Monthly Jobs Report (February 2008 Edition)

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The economy shed 17,000 jobs in January 2008 according to this morning's Non-Farm Payrolls report.

Because markets had expected a job gain of 70,000, the negative number supports the idea that the economy is slowing down faster than markets had planned.

This is because when fewer people work, there are fewer payroll dollars getting pumped back into American businesses.

An outlook for weaker profitablity ends up sucking money out from the stock market and that money is often moved into bonds for safe-keeping -- including mortgage bonds. 

This added demand for bonds increases the bond prices.  This decreases their yields and is why bad economic forecasts tends to drop mortgage rates.

This morning, in response to the -17,000 figure, mortgage rates are predictably edging lower.  But the movement is more a function of Human Nature than of statistical analysis.

Why?  Because it do be that way.

If we compare the expectation of the jobs report to the reality of the jobs report, the variance we're seeing is a drop in the proverbial ocean.

Consider the following (subject to revision in Feburary and March 2008):

• 87,000 fewer jobs were created in January 2008 than was expected
• 64,000 more jobs were created in December 2007 than previously measured
• 55,000 fewer jobs were created in November 2007 was than previously measured

Adding it up, today's news is that the economy is 77,000 working Americans weaker than expected.  But the real story is that 77,000 workers is a statistical blip. 

It's not even a blip.  It's a blip on a blip.

Put 77,000 against the total work force of 153,824,000 and you see that, in percentage terms, the "weakness" represents 0.050% of the overall workforce.  That's peanuts.

Let's put that 0.050% adjustment in mathematical perspective:

• 0.0050 percent is one more light year away for "she"
• 0.0050 percent is one more year in this man's life
• 0.0050 percent is one more foot in this diver's dive

Statistically, 0.0050 percent is insignificant.  And yet, mortgage rates are moving on it.

Just like the last four times (1 2 3 4) we looked at the jobs report, markets are reacting as forcefully to psychological drivers as to fundamental ones.