Once again, the U.S. Bureau of Labor Statistics' (BLS) employment situation report for June is not consistent with the information implied by the U.S. Treasury Department's payroll tax receipts data.
This is an issue that has been ongoing and widening for almost two years -- a situation that I've written about repeatedly during that time. Rather than simply reiterate the discrepancy issues that I've discussed in previous columns, I urge subscribers to re-read my previous columns, here, here, here, and here.
These observations are not solely being made by me. David Stockman discussed the issue about a year ago, and many others have as well.
The bottom line is that the BLS figures are overstating the number of jobs being created, which is helping to result in an understatement of unemployment. This is not a minor issue, as the overstatement is based on what is implied by payroll tax receipts, which are now about 2 million jobs and growing.
The Treasury's market participants are increasingly exhibiting an awareness of the situation and how the BLS' figures are now essentially useless as an indicator of economic activity. This is evident in the 10-year Treasury yield, which was moving up by about six basis points following the release of the BLS report. The 10-year Treasury then immediately began reversing and moving back to the yield that prevailed before the release, which is also very near an all-time record low.
If bond traders believed the report had any economic indicator value that would not have occurred. Meanwhile, gold and oil exhibited a similar pattern to bonds.
Equity market participants do not seem to exhibit the same awareness as to the uselessness of the BLS report. However, it may be the result of the relentless pontificating by financial market pundits, concerning the report when it is released, who also exhibited little awareness about the lack of substance in the report.
The important issue is that the BLS data is used as an input to the Federal Reserve's model on economic activity, FRB/US, and it is indicative of the system's dilemma that the Fed has to contend with.
BLS data is consistent with the Fed's narrative for the continuing need for rate hikes in the U.S., and traders responded by increasing the probability of a Fed rate hike in September from 0%, before the jobs report was released, to 12% afterwards.There's nothing wrong with traders responding in this fashion, because the Fed has continued to maintain that it will follow the FRB/US model. The problem, however, is that payroll tax receipts are providing a profoundly different perspective on the health of the jobs market.
This is evident in the tracking performed by the folks at Mathematical Investment Decisions, which I've discussed many times before. Although it is currently providing the graph on its home page, the chart and the data used to create it are proprietary and normally reserved for paid subscribers. I don't know how long it'll leave the graph up on its site, so I've added it here with the firm's permission.
This is a graphical depiction of the seasonally adjusted growth in payroll tax receipts that are received by the Treasury.
After briefly going positive for two months previous to June, it abruptly reversed course during the month and is now back in contraction. It is impossible for payroll tax receipts to shrink during the same period, in which 287,000 jobs were reportedly added to the economy.
It's also impossible that the Federal Open Market Committee members are not aware of this discrepancy between actual money received by the Treasury and the number of jobs estimated number of jobs created as reported by the BLS.
The problem for the FOMC is that tax receipts are not a FRB/US input, while the BLS data is. The result is garbage in, garbage out (GIGO).
The payroll tax receipts, which are available daily, are what bond market participants have been using as support for the abrupt decline in U.S. Treasury yields that occurred in June.
The critically important point here is that, contrary to the media, the decline in U.S. Treasury yields is not a result of the Brexit vote and concerns about further European political and economic instability. Bonds traders are responding principally to the deteriorating domestic U.S. economic data.
The bond market is tracking the tax receipts and expecting the Fed to reverse course on the monetary tightening projections soon. Until the Fed finds an excuse for doing so, long-end Treasury yields will likely continue to grind lower.
