Written by Steven Hansen
The BLS jobs report never fails to add excitement. The headline data was sure to disappoint everyone, and the Econintersect view of the data is more like Goldilocks view of the bears porridge.
- the real jobs gain comparing February to March is actually smaller than last year, and is low historically. However, the year-over-year comparisons are ok.
- regardless on any interpretation – the big picture is that jobs growth this month is representative of an economy running at potential. In other words, the jobs growth matches a moderately growing economy. In the coming months, we will see if the previous better than expected employment growth was an illusion.
A summary of the March 2012 employment situation:
- BLS reported: 120K (non-farm) and 121K (non-farm private). Unemployment = 8.2% (down 0.1%)
- ADP reported: 209K (non-farm private)
- Market expected: 200K to 230K (non-farm), 8.2% to 8.3% unemployment
- Econintersect‘s Forecast: 125K (non-farm private)(made in January 2012).
Non-seasonally adjusted non-farm payrolls rose 706,000 – historically not good in comparison with pre-recession jobs growth (or even last year).
Most of the analysis below uses unadjusted data, and presents an alternative view to the headline data.
The BLS reported U-3 (headline) unemployment at 8.2% with the U-6 “all in” unemployment rate (including those working part time who want a full time job) declined from 14.9% to 14.5%. Econintersect has an interpretation of employment supply slack using the BLS unadjusted data base, demonstrated by the graph below.
Overall this chart is telling you that there is a question whether the improvements we have been seeing over the last six months are real (see Ben Bernanke and the Puzzle of Employment) – and really, the jobs picture when you view the population as a whole, has NOT improved since the end of the recession (regardless of changes in the unemployment rate).
- 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).
- In the latest BLS report employment-population ratio declined from 58.6 to 58.5. 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.
The March data returned the rate of growth back to flat – not negative as suggested by the headline data. Many times the comparison to the previous month distorts the real trends – and the growth trend is not negative despite the crappy comparable growth to last month.
- Average hours worked (table B-2) 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 1,000 with the Federal Government unchanged – while state governments expanded 2,000 and local governments contracted 3,000.
- The big contributors to employment growth this month were various administrative services (31K), manufacturing (37K), health care (26K), and food/drink services (38.2K). The big drags this month were merchandise stores (32.3K) and employment services (14.2K).
- Manufacturing rose 37,000 and construction fell 7,000.
- The unemployment rate for people between 20 and 24 (Table A-10) fell dramatically from 13.8% to 13.2%. This number is produced by survey and is very volatile.
- Average hourly earnings (Table B-3) rose from an upwardly revised $23.34 to $23.39. Wages growth remains in a “less good” trend.
Economic markers used to benchmark economic growth were ok, and well away from recessionary levels.
The transport sector employment was unchanged month-over-month. Specifically, truck transport declined this month – but remains in the range seen over the last 6 months.
The support services industry (including temporary help) was also improved 0.2% month-over-month. Specifically, temporary help declined this month and remains in the growth range seen during the last 6 months).
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 has the following 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.