Best to low-ball today's employment report

The addition of 204,000 payroll jobs last month was a nice surprise and will no doubt get lots of attention by the general media. But it's only a single month, and today's figure will be subject to several revisions, including an adjustment of the entire year's data, known as benchmarking. (Data from the two previous months were revised significantly.) More to the point, as Bloomberg columnist Barry Ritholtz reminds us, month-to-month statistics are not the best way to gauge how the economy is doing. He calls the government's employment report "the single most over-hyped, over-analyzed, over-emphasized, least-understood economic releases known to mankind."

Each month, approximately 4 million people leave their jobs, Retirement, layoffs, career changes, whatever. Another 4 million people start new jobs: recent graduates, re-entries to the work force, job changers. What the monthly Employment Situation report measures -- in near real time -- is the net changes between those two numbers. Take the total net number of new hires, subtract the job losses, and you get the marginal change in employment. Since we begin with such a huge number -- 150 million-plus -- and the monthly net changes are so small (50-200k), the overall change is not especially statistically significant. The net changes amount to about one twentieth and one quarter of a percent. During the height of the financial crisis in 2008-09, the net change was about half a percent (-700k). Thus, any single 0.1 percent data point needs to be recognized for what it is. It is but one data point in a longer series. And not an especially accurate one initially.

The Washington Post's Brad Plumer has a good explainer on why the labor force keeps shrinking - and why much of it has little to do with how well or poorly the economy is now performing:

Baby boomers are starting to retire en masse, which means that there are fewer eligible American workers. Demographics have always played a big role in the rise and fall of the labor force. Between 1960 and 2000, the labor force in the United States surged from 59 percent to a peak of 67.3 percent. That was largely due to the fact that more women were entering the labor force while improvements in health and information technology allowed Americans to work more years. But since 2000, the labor force rate has been declining steadily as the baby-boom generation has been retiring. Because of this, the Federal Reserve Bank of Chicago expects the labor force participation rate to be lower in 2020 than it is today, regardless of how well the economy does.