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Sound Advice: February 9, 2022

Economics: The Great Guessing Game 

Among the most interesting (and controversial) developments affecting the investment markets are the periodic reports on what’s taking place in the economy.  The ongoing flow of information includes the weekly level of new unemployment claims, the monthly reports on the consumer price index, and the monthly reports on new jobs.  Although many esteemed economists provide regular weighty pronouncements on what the new numbers will be, the accuracy of same is on a par with a blindfolded person throwing at a dartboard.

Indeed, prior to the announcement of the job numbers for January, economists put forth estimates that averaged 150,000 new jobs, suggesting that the situation was significantly constrained by the dramatic jump in Omicron variant Covid cases.  Several even forecast a substantial drop in the jobs total.

The actual result was quite different: 467,000 new jobs.

It gets much worse because the numbers reported each month are always revised, usually by a lot.  In December, the initial report was an addition of 199,000 new jobs.  That was later revised to 510,000 new jobs.  The November report estimated 249,000 new jobs, but that was revised to 647,000 new jobs.

Not only is the probability of a gross error of concern, but equally important are the assumptions created as a result.  Given the ongoing strength in demand for goods and services, one of the biggest challenges facing businesses is finding enough labor to provide the required supply.  This have resulted in higher salaries, sign-up bonuses, and the ongoing need to maintain adequate staffing.  The latter is still constrained by health-related absences.

This relative imbalance has led to a continuation of an inflation rate that’s several times the level seen as optimal by the Federal Reserve.  Although the Fed’s actions are supposed to take into account a wide variety of business measures, the report on new jobs, even though often wide of the mark, cannot be ignored.  That makes the Central Bank’s task even more challenging.

As a result, it seems appropriate to avoid knee-jerk reactions to the ongoing flow of business information.  Patience and perspective against a long-term context will prove to be more worthwhile.

N. Russell Wayne, CFP®

Sound Asset Management Inc.

Weston, CT  06883

203-222-9370

www.soundasset.com

www.soundasset.blogspot.com

Any questions?  Please contact me at nrwayne@soundasset.com

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