As the disconnect between payroll data and GDP grows, and the schrodinger reality of a non-farm-payroll print and JOLTs data increases; it will not come as a total surprise to Zero Hedge readers that Goldman Sachs has finally been forced to admit that investors have been fooled by the relative importance of jobs data. While the payrolls data has the largest financial market effect of all economic indicators (by a large margin), Jan Hatzius finds that neither payrolls (or Advance GDP) provide any incremental information about the broad strength of the economy.
Via Goldman Sachs,
Every investor knows that US economic data releases can trigger large price moves in the Treasury bond market.
Exhibit 1 shows the impact of a 1-standard-deviation (SD) surprise in the most important US economic activity indicators relative to the Bloomberg consensus in the 20 minutes surrounding the release.
Payrolls Have by Far the Biggest Impact on the Bond Market
Economic data releases are also important for the equity market, although the relationship is not quite as strong. Exhibit 2 repeats the previous exercise with the price of S&P 500 futures in the 20 minutes surrounding the release.
Payrolls Also Most Powerful for Stocks, But It’s a Closer Call
At least in the Treasury market, the payroll release has recently become even more dominant.
But – given all this ‘efficient’ market moving information… the fact is that neither the payrolls nor advance GDP data provide much incremental economic information…
Our most important finding is that the impact of both nonfarm payrolls and advance GDP is small and statistically insignificant, whether we focus on the CAI or the change in the unemployment rate.
Thus, neither indicator seems to contain statistically significant information for growth when evaluated on a first-release basis.
Why is it that payrolls and GDP – the two most market-moving releases in the US data calendar – provide so little incremental information about the economy?
First-release data can look very different from fully revised data.
It is difficult to overemphasize the importance of using first-release data for the explanatory variables in our analysis. Payrolls and GDP are subject to heavy revisions between the first release and the fully revised version. Some of these revisions occur in the next monthly or quarterly release, and some occur with much longer lags via the annual revisions. And they are very important; if we re-run our regressions using fully revised data, both payrolls and GDP become statistically significant as predictors of future growth. But revised data are obviously not available in real time.
And as far as the market being efficient?
Some readers will undoubtedly be skeptical of our results on the grounds of market efficiency. How could the financial markets possibly put so much weight on indicators that in reality provide little useful information about the economy? Does this not fly in the face of the idea that financial markets are powerful aggregators of information that will seek out the most accurate possible signals about the future?
First, although market efficiency is a powerful idea, the empirical finance literature of the past three decades has made it clear that financial markets are not always perfectly efficient… Our results suggest that these investors will put too much weight on indicators that tend to get heavily revised and are not very informative in real time. Moreover, many investors seem to look for a simple, high-profile summary of the performance of the economy, rather than piecing together a composite picture from many different reports. And the highest-profile indicators are the monthly employment report and the quarterly GDP report.
Second, part of the market’s outsized sensitivity to payrolls is probably directly due to recent Fed communications. Given the limited usefulness of first-release nonfarm payroll numbers, we believe that the distinction between an initial print of 162,000 and one of 180,000-200,000 is too small to determine whether Fed officials should make a significant policy change. But if the markets have some reason to believe that this distinction will in fact drive Fed policy, the outsized response to relatively small and economically meaningless payroll surprises may not be so irrational.
So, the bottom line is that market moves off the headline data releases of the Payrolls and GDP are inefficient and based on a false belief that this data in some way indicates improving (or deteriorating) economic conditions. Once again, investors have been fooled by an ongoing mythology about the often noisy (and always revised) data and the mainstream media’s need for a headline upon which to hang the manipulation-du-jour.