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posted on 02 June 2017

May 2017 BLS Jobs Situation Softer

Written by Steven Hansen

The headline seasonally adjusted BLS job growth was well below expectations. Last month's gains were revised down.

Analyst Opinion of the BLS Employment Situation

The household and establishment surveys were well out of sync this month. The unemployment rate drop was caused by a decline in the size of the workforce. One has mixed feeling while diving into the data - is the glass half full or empty?

  • The year-over-year rate of growth for employment improved this month (red line on graph below). This is a year-over-year analysis which has no seasonality issues.

  • Economic intuitive sectors of employment were mixed.
  • This month's report internals (comparing household to establishment data sets) was fairly inconsistent with the household survey showing seasonally adjusted employment declining 233,000 vs the headline establishment number of growing 138,000. The point here is that part of the headlines are from the household survey (such as the unemployment rate) and part is from the establishment survey (job growth). From a survey control point of view - the common element is jobs growth - and if they do not match, your confidence in either survey is diminished. [note that the household survey includes ALL jobs growth, not just non-farm).
  • The household survey removed 429,000 people to the labor force.
  • The NFIB statement on jobs is at the end of this post.

A summary of the employment situation:

  • BLS reported: 138K (non-farm) and 147K (non-farm private). Unemployment rate improved 0.1 % to 4.3 %.
  • ADP reported: 253K (non-farm private)
  • In Econintersect's May 2017 economic forecast released in late April, we estimated non-farm private payroll growth at 125,000 (based on economic potential) and 195,000 (fudged based on current overrun of economic potential);
  • The market expected (from Bloomberg / Econoday):
Seasonally Adjusted Data Consensus Range Consensus Actual
Nonfarm Payrolls - M/M change 140,000 to 210,000 185,000 138,000
Unemployment Rate - Level 4.3 % to 4.5 % 4.4 % 4.3 %
Private Payrolls - M/M change 140,000 to 200,000 172,000 147,000
Participation Rate - level 62.7 %
Average Hourly Earnings - M/M change 0.2 % to 0.3 % 0.2 % +0.2 %
Average Hourly Earnings - Y/Y change 2.5 % to 2.7 % 2.6 % +2.5 %
Av Workweek - All Employees
34.4 hrs to 34.5 hrs
34.4 hrs 34.4 hrs

The BLS reports seasonally adjusted data - manipulated with multiple seasonal adjustment factors, and Econintersect believes the unadjusted data gives a clearer picture of the jobs situation.

Non-seasonally adjusted non-farm payrolls grew 888,000 - about average for times of economic expansion - and the worst showing since 2013.

The comparing the jobs gains this month with the same month historically:

Last month's headline employment gains were revised down. Generally speaking, employment is overstated when the economy is slowing and understated when the economy is accelerating.

Most of the analysis below uses unadjusted data, and presents an alternative view to the headline data.

Unemployment

The BLS reported U-3 (headline) unemployment was 4.3 % with the U-6 "all in" unemployment rate (including those working part time who want a full time job) improved 0.2 % to 8.4 %. These numbers are volatile as they are created from the household survey.

BLS U-3 Headline Unemployment (red line, left axis), U-6 All In Unemployment (blue line, left axis), and Median Duration of Unemployment (green line, right axis)

Econintersect has an interpretation of employment supply slack using the BLS employment-population ratio, demonstrated by the graph below. The employment-population ratio was improved 0.2 to 60.0.

Employment-Population Ratio

The jobs picture - when the employment / population as a whole - has been on an uptrend since mid-2011. This ratio is determined by household survey.

  • Econintersect uses employment-populations ratios to monitor the jobless situation. The headline unemployment number requires the BLS to guess at the size of the workforce, then guess again who is employed or not employed. In employment - population ratios, the population is a given and the guess is who is employed.
  • This ratio has been in a general uptrend since the beginning of 2014. The employment-population ratio tells you the percent of the population with a job. Each 0.1% increment represents approximately 300,000 jobs. [Note: these are seasonally adjusted numbers - and we are relying on the BLS to get this seasonal adjustment factor correct]. An unchanged ratio would be telling you that jobs growth was around 150,000 - as this is approximately the new entries to the labor market caused by population growth.

Employment Metrics

The growth trend in the establishment survey's non-farm payroll year-over-year growth rate was trending up beginning of 2014 but has been trending down beginning in 2015. Year-over-year growth improved this month.

Unadjusted Non-Farm Payrolls Year-over-Year Growth

Another way to view employment is to watch the total hours worked which are in a long term downtrend - but currently in a short term uptrend.

Percent Change Year-over-Year Non-Farm Private Weekly Hours Worked

The bullets below use seasonally adjusted data from the establishment survey except where indicated:

  • Average hours worked (table B-2) was unchanged at 34.4. A rising number normally indicates an expanding economy .
  • Government employment declined 9,000 (9K) with the Federal Government up 8K, state governments down 8K and local governments down 9K.
  • The big contributor to employment growth this month was health care and support services (32.3K).
  • Manufacturing was down 1K, and construction was up 11K.
  • The unemployment rate (from household survey) for people between 20 and 24 (Table A-10) was improved 0.6 to 6.7 %. This number is produced by survey and is very volatile.
  • Average hourly earnings (Table B-3) was up $0.04 to $26.22.

Private Employment: Average Hourly Earnings

Economic Metrics

Economic markers used to benchmark economic growth (all from the establishment survey).

The truck employment was down 0.1K.

Truck Transport Employment - Year-over-Year Change

Temporary help up 12.9K.

Temporary Help Employment - Year-over-Year Change

Econintersect believes the transport sector is a forward indicator. Others look at temporary help as a forward indicator.

Food for Thought

Who are the victims in this employment situation. It is not people over 55.

Index of Employment Levels - 55 and up (blue line), 45 to 54 (red line), 35 to 44 (green line), 25 to 34 (purple line), 20 to 24 (light blue line), and 16 to 19 (orange line)

Women are doing better than men.

Index of Employment Levels - Men (blue line) vs Women (red line)

Mom and Pop employment remains below recessionary levels.

The less education one has, the less chance of finding a job.

Index of Employment Levels - University graduate (blue line), Some college or AA degree (orange line), high school graduates (green line), and high school dropouts (red line)

Here is an indexed view of employment levels.

Index of Employment Levels (from the BLS Establishment Survey) - Hispanic (blue line), African American (red line), and White (green line)

However, keep in mind that population growth is different for each group. Here is a look at employment to population ratios which clearly shows NO group has recovered from the Great Recession:

Employment / Population Ratios (from the BLS Household Survey) - Hispanic (blue line), African American (red line), and White (green line)

NFIB SMALL BUSINESS JOBS REPORT

Overall job creation among small businesses edged higher in May, powered mainly by stronger hiring plans and job openings:

"Small business owners are starting to convert their optimism into action," said NFIB President and CEO Juanita Duggan. "It's a sign of a healthier economy."

Small business owners reported a seasonally adjusted average employment change of 0.34 workers per firm. Thirty-four percent of owners reported job openings, a one-point increase over the April report and the highest level since 2001. Firms reporting plans to hire increased two points to a net 18 percent, which is the strongest reading since 2006.

"Firms are adding workers, creating new positions, and increasing compensation to attract better applicants and keep their best performers," said NFIB Chief Economist Bill Dunkelberg. "If there is a dark cloud in the data, it is that there aren't enough qualified workers to fill the available jobs. That puts a strain on small employers."

When it came to finding qualified workers, 51 percent of small firms said they came across "few" or "none." According to the data, 12 percent of small firms relied on temporary workers in May, an increase of two points from April and another sign of a tightening labor market.

"The really good news is that small firms want to hire, and they are trying hard to create more jobs. The bad news is that they're having a very hard time finding qualified workers," said Dunkelberg. "That's forcing them to increase compensation to stay competitive and hire temporary workers, but they are still having a difficult time increasing prices to absorb the additional costs."

Caveat on the use of BLS Jobs Data

The monthly headline data ends up being significantly revised for months after the initial release - and is subject also to annual revisions. The question remains how seriously can you take the data when first released.

Econintersect Contributor Jeff Miller has the following description of BLS methodology:

  1. An initial report of a survey of establishments. Even if the survey sample was perfect (and we all know that it is not) and the response rate was 100% (which it is not) the sampling error alone for a 90% confidence interval is +/- 100K jobs.
  2. The report is revised to reflect additional responses over the next two months.
  3. There is an adjustment to account for job creation — much maligned and misunderstood by nearly everyone.
  4. The final data are benchmarked against the state employment data every year. This usually shows that the overall process was very good, but it led to major downward adjustments at the time of the recession. More recently, the BLS estimates have been too low.

ADP (blue line) versus BLS (red line) - Monthly Jobs Growth Comparison

However, there is some discussion that neither the ADP nor BLS numbers are correct - as both are derived by a sampling methodology. The answer could be that there is no correct answer in real time - and that it is best to look at the trends. As has been noted, all eventually end up correlating.

The BLS uses seasonal adjusted data for its headline numbers. The seasonally adjusted employment data is produced by an algorithm. The following graph which shows unadjusted job growth - seasonal adjustments spread employment growth over the entire year. Employment does not really grow in the second half of the year and always falls significantly in January.

Non-Seasonally Adjusted Employment - Private Sector

There is the proverbial question on what is minimal jobs growth each month required to allow for new entrants to the market. Depending on mindset, this answer varies. According to Investopdia, the number is between 100,000 and 150,000. The Wall Street Journal is citing 125K. Mark Zandi said 150K. Econintersect is going with Mark Zandi's number:

  • In Econintersect's June 2014 economic forecast released in late May, we estimated non-farm payroll growth at 160,000 (unadjusted based on economic potential) and 229,000 (fudged based on current overrun of economic potential).
  • If Econintersect uses employment - population ratios, the correct number would be the number where this ratio improved. Using the graph below, the ratio began to improve starting a little after mid-year. This corresponds to the period where the 12 month rolling average of job gains hit 150,000.

Employment to Population Ratio

Note: The ratio could be fine tuned by adjusting to the ratio of employment to working age population rather than the total population. However, this would not change the big picture that an increase of somewhere around 150,000 (+/-) is needed for the growing population numbers. We have estimated 140k - 160k. The number might possibly be within the range 125k - 175k. Econintersect cannot find reason to support the estimates below 125k.

The question of how changing demographics impact the employment numbers is at the margins of analysis. Econintersect will publish more on this fine tuning going forward, both in-house research and the work of others.



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