On revisions

April 3, 2009 in Finance

A lot of headlines this morning are noting that the jobs report is "in line with expectations", with a change of 663,000 vs the survey median of 660,000. What gets ignored is the revised number. For 13 straight months, the prior month's number has been revised lower by a significant amount after the fact - ranging from 50,000 a year ago to more than 100,000 in recent months. The following is a chart of the reported number (white) vs the revised number (red) (click to zoom). The green line represents the survey.


How this trend gets ignored by the market is beyond me.  I'm not sure if it's systemic over-optimism built in to the reported number (read: arbitrary massaging of the data) or what, but it's a bit ridiculous.

We generally assume that the market "prices expectations", meaning if data is better than expected the market rallies; if not, if falls.  But one thing the market fails to do is price expectations of back-dated revisions.  If today's number were announced as 150,000 more jobs lost than expected, we'd have a full scale rout on our hands.  But hold off a couple months and make that announcement as part of an after-the-fact revision and the reaction is notably dampened. Indeed, in February the January number was revised down by around 60,000 and this month it was revised down almost another 100,000.

The sum of the failures to account for revisions like these, in my opinion, is an enormous sword hanging over the market.  It may not take much to release it.

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