Written by Steven Hansen
A summary of the February 2012 employment situation:
- BLS reported: 227K (non-farm) and 233K (non-farm private). Unemployment = 8.3% (unchanged)
- ADP reported: 216K (non-farm private)
- Market expected: 150K to 206K (non-farm), 8.3% unemployment
- Econintersect‘s Forecast: 95K (non-farm private)(made in January 2012)
While many pundits are saying the good news is an upward revision to the January 2012 jobs growth estimate (and it is good news), there are many strong data points in the February data. It is difficult to badmouth this data. However, the great news is only in the seasonally adjusted data, the unadjusted data is providing better context.
- the same effect I saw in the ADP data also is in the BLS data – the year-over-year rate of growth in employment declined.
- the real jobs gain this year is actually smaller than last year.
The takeaway is an inconsistent seasonal adjustment. This clouds our understanding of the data. One thing is clear – the 2011 and 2012 job growth numbers are comparable to the two best inter-recession years 2005 and 2006. The more recent numbers (2010-11) are weaker, however, because they come against a much bigger unemployment background.
The red arrow shows the ten month improvement trend for employment gains. The question marks ask if this can continue.
Econintersect uses employment-populations ratios to monitor the jobless situation. Changes in the base data effect our view of the economy. Below is the Employment / Population ratio – and what it is telling you is that jobs growth is keeping up with population growth (but seemingly no higher).
Looking below the headlines using seasonally adjusted data:
- In the latest BLS report employment-population ratio was improved from 58.5 to 58.6. 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. As an example, in February it would mean that 150,000 plus 300,000 jobs would be created – or 450,000 jobs.
- Econintersect does not like the BLS methodology of determining unemployment – only participation rates or employment-populations ratios tell you what is really going on with unemployment. But for those who like to read this the headline U-3 unemployment rate was unchanged at 8.3%. Note that the Establishment Survey (which is the basis of the employment gains) and the Household Survey (which is the basis of the unemployment rate) numbers do not align.
- The U-6 “all in” unemployment rate (including those working part time who want a full time job) rose declined from 15.1% to 14.9%.
- Average hours worked (table B-2) remained fell from 34.5 to 34.3. A rising number indicates an expanding economy if the employment is also rising. This month’s number declined.
- Government employment contracted 6,000 with the Federal Government contracting 7,000 – while state governments contracted 1,000 and local governments expanded 2,000.
- The big contributors to employment growth this month were manufacturing (31k), trade and transportation (37K), various administrative services (61.1K), health care (61.1K), and food/drink services (44.5K). The big drags this month were merchandise stores (-35.4K) and construction (-13K).
- Economic markers used to benchmark economic growth were up. The transport sector employment was up 0.24% month-over-month. The support services industry (including temporary help) was also improved 2.0% month-over-month. Econintersect believes the transport sector is a forward indicator. Others look at temporary help as a forward indicator, and this is positive also.
- Manufacturing rose 31,000 and construction fell 13,000.
- The unemployment rate for people between 20 and 24 (Table A-10) rose dramatically from 13.3% to 13.8%. This number is produced by survey and is very volatile.
- Average hourly earnings (Table B-3) rose from an upwardly revised $23.28 to $23.31.
NFIB Jobs Statement
Chief economist for the National Federation of Independent Business (NFIB) William C. Dunkelberg, issued the following statement on January small business job growth:
“February’s report is a mixed bag for jobs creation on Main Street. For small employers, the net change in employment per firm (seasonally adjusted) was 0.11. This is certainly better than January’s net zero report and trending in the right direction, but still nothing to get overly excited about.
“Seasonally adjusted, 12 percent of the owners added an average of 3.4 workers per firm over the past few months, and 14 percent reduced employment an average of 2.4 workers per firm. The remaining 74 percent of owners made no net change in employment. While the percent of firms reducing employment out weighted those increasing, the number of jobs added was more than those lost and that’s the good news. But strong jobs growth though won’t occur until more firms increase employment.
The net percent of owners planning to create new jobs fell 1 point to 4 percent (seasonally adjusted)—the third monthly decline. Unadjusted, 16 percent plan to increase employment and 6 percent plan reductions, meaning we can expect a few new jobs from Main Street in the coming months. However, from the start of the expansion (July 2009), job creation plans continue to lag all other recovery periods, including the ‘jobless recovery’ in 2001 where employment losses were relatively small to begin with.
“The ability to find qualified applicants for available jobs continues to be a problem for many small business owners. Forty-two percent of owners hired or tried to hire in the last three months and 32 percent of them reported few or no qualified applicants for positions.
“The percent of owners reporting hard to fill job openings fell 1 point to 17 percent, but still one of the best readings in years. It is a good predictor of the unemployment rate and anticipates little change in the current 8.3 percent reading unless there is a large reduction in those looking for work, exiting the labor force.
“Overall, the February NFIB survey anticipates some strength in the job creation number with little change in the unemployment rate. With job openings and plans for job creation falling a bit, prospects for a surge in the small-business sector are still not promising.”
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.
The above graphic (updated through October 2011) is the month-over-month change in employment based on the original headline non-farm employment level and the current stated employment levels at month end. You will note some pretty drastic backward revision for a major economic release the market reacts to in real time.
Econintersect Contributor Jeff Miller’s description of BLS methodology:
- 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.
- The report is revised to reflect additional responses over the next two months.
- There is an adjustment to account for job creation — much maligned and misunderstood by nearly everyone.
- 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.
Econintersect has repeatedly pointed out questions about how the seasonal adjustment algorithms and data gathering methodology used by the BLS introduce uncertainty into interpretation of month to month changes in employment.
Econintersect believes the simplistic sampling extrapolation technique of ADP yields a far better picture of the employment situation than the complicated, convoluted Bureau of Labor Statistics (BLS) methodology.
Because of the differences in methodology, many pundits ignore the ADP numbers – while waiting for the BLS numbers. Although there can be a low correlation in a particular month, the different methodologies tend to balance out, and the correlations are excellent outside of the data turning points. We are now 16 months past the post recession turning point in employment.
However, there is some discussion that neither the ADP or 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 Januarys.
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:
- If Econintersect used employment / population ratios to determine the number, the exact number seems to be between 140,000 and 160,000. The graph below uses the historical employment-population ratios to show jobs growth per month if the population was 300 million.
- 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.
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.