Parsing jobs report

Here's what economist Sung Won Sohn has to say about today's employment numbers:

The economy is on such a steep downhill; it is scary. There is no indication that the job situation would stabilize anytime soon. This could turn out to be one of the worst economic setbacks since the Great Depression.. .The true unemployment rate is higher than the 7.2% reported today. Thinking that there are no jobs to be had, discouraged workers are dropping out of the labor force. Many people are working part-time even though they prefer a full-time job. The effective unemployment rate including the discouraged and the part-timers for economic reasons is 13.5% compared to 8.8% a year ago. The higher jobless rate is feeding upon itself and will exceed 9% during the first half of 2010.

Now here's what Big Picture blogger Barry Ritholtz has to say:

Get a grip, people. I’ve been dying to tell that to the parade of sycophants, pundits and talking heads who have been aghast at the possibility of a really really bad [non-farm payroll] number today. Here’s a newsflash, folks: The employment situation in the US is bad. Whether today’s 8:30 data release is a loss of 1 million, or a gain of 50,000, it really does not matter one teeny bit. Why is that? Because it really isn’t news.

Thing is, these two guys don't necessarily disagree - they're just looking at the same image in different ways. Ritholtz says the doomsday-ish coverage is a product of the recency effect - the tendency to be overly influenced by the most recent events, as opposed to the most important ones. "Why should this one report matter so much?" he asks. "The only thing that I can think of is it gives the next stimulus plan an impetus to get over a trillion dollars."

He's got a point - there's little in today's report that should have been a surprise. Yes, the numbers are terrible, but they were supposed to have been terrible - and they will continue to be terrible for at least the next three or four months. But how that realized expectation gets reported is tricky business. You could sound hysterical, which is a misleading reaction because it suggests surprise – and with it, the overwrought view that the economy is truly out-of-control. Or you could be matter of fact, which is also misleading because it minimizes the seriousness of the situation. But here's the biggest problem: our realized expectation does not provide much help in forecasting the future. Conventional wisdom says that we'll start seeing some improvement late this year or early next, but we all know how reliable conventional wisdom has been these past couple of years. UCLA's Ed Leamer still offers the best summation:

Forecasting depends on some reasonable similarity between current situations and episodes in the historical data. But there is SOOO MUCH data over the last several months that we haven’t seen before. These abnormalities limit the power of statistical forecasting, forcing us to rely more on hunches.