Written by Steven Hansen
The BLS jobs report was simply not good.
- the real jobs gain comparing April to March is actually smaller than either 2011 or 2011.
- regardless on any interpretation – the big picture is that jobs growth is one would expect in the current economic situation.
- would any pundit like to stand up and defend the way unemployment is defined – there is little excuse for having a methodology that lowered the unemployment rate for the last two months by again reducing the workforce by 342,000.
A summary of the March 2012 employment situation:
- BLS reported: 115K (non-farm) and 130K (non-farm private). Unemployment = 8.1% (down 0.1%)
- ADP reported: 119K (non-farm private)
- Market expected: 140K to 162K (non-farm), 8.2% unemployment
- Econintersect‘s Forecast: 130K (non-farm private).
Non-seasonally adjusted non-farm payrolls rose 896,000 – historically not good or bad good in comparison with pre-recession jobs growth.
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 8.1% with the U-6 “all in” unemployment rate (including those working part time who want a full time job) unchanged at 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 58.5 to 58.4. 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.
This month the trend rate of growth is now negative, with job gains considered less good than gains in the last 12 months.
- Average hours worked (table B-2) remained unchanged at 34.5. A rising number indicates an expanding economy if the employment is also rising. This month’s number declined.
- Government employment contracted 15,000 with the Federal Government down 4,000 – while state governments expanded 1,000 and local governments contracted 12,000.
- The big contributors to employment growth this month were various administrative services (37.1K), professional and technical services (27.5K), health care (19K), retail trade (29.3K) and food/drink services (26.7K). The big drags this month were arts and entertainment (15.1K) and government (15.0K).
- Manufacturing rose 37,000 and construction fell 7,000.
- The unemployment rate for people between 20 and 24 (Table A-10) remained unchanged at 13.2%. This number is produced by survey and is very volatile.
- Average hourly earnings (Table B-3) rose by a penny to $23.38. 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 again this month – but remains in the range seen over the last 6 months – and still indicative of a moderately expanding economy.
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).
Econintersect believes the transport sector is a forward indicator. Others look at temporary help as a forward indicator, and this is positive also.
Chief economist for the National Federation of Independent Business (NFIB) William C. Dunkelberg, issued the following statement prior to the release of the jobs report:
“April was another tenuous month for small businesses, sending mixed signals about what the future holds.
“On the job creation front, the news was only fair. The net change in employment per firm (seasonally adjusted) came in at 0.1; this is down from March but still positive. Seasonally adjusted, 12 percent of owners surveyed added an average of 3.3 workers per firm over the past few months, and 14 percent reduced employment an average of 2.9 workers per firm. The remaining 74 percent of owners made no net change in employment.
“Many news stories have reported a trend that is bearing out in the small-business sector: the ability to find qualified applicants for available jobs is a problem. Forty-seven (47) percent of owners hired or tried to hire in the last three months. Thirty-four (34) percent of owners (or 72 percent of those trying to hire or hiring) reported few or no qualified applicants for positions. While firms have eased lay-offs, they haven’t resumed strong hiring. Unemployment claims remain high and seasonal adjustments are off track as hiring, normally done in March and April, may have occurred earlier in the year.
“The percent of owners reporting hard to fill job openings rose 2 points to 17 percent, one point below the January 2012 reading which is the highest we’ve reported since June 2008. Hard-to-fill job openings are a strong predictor of the unemployment rate, making the gain in openings a welcome development. The net percent of owners planning to create new jobs is 5 percent, a 5 point increase after taking a plunge in March. Not seasonally adjusted, 18 percent plan to increase employment at their firm (up 3 points), and 5 percent plan reductions (unchanged from March).
“Overall, the April NFIB survey anticipates some strength in the job creation number with little change in the unemployment rate. With job creation plans rebounding, the outlook is a bit more optimistic for the second quarter, but it’s important that we not get ahead of ourselves. April was no ‘barn burner’ for job growth.”
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.