Written by Steven Hansen
The May BLS jobs report – although not excellent – is likely better than you or the pundits believe.
- the real unadjusted jobs gain comparing May to April is actually the largest since the end of the Great Recession. The BLS has serious issues with their seasonal adjustment methods.
- regardless of any interpretation – mediocre jobs growth is what one would expect in the current economic climate.
- any fool can find discrepancies in this report. This fool loves the discrepancy between the unemployment rate rising, and the employment to population ratio improving which are totally conflicting.
- the cold chill in this report is that the year-over-year employment growth improvement has been negative for the last two months.
- last month report was terrible, and the BLS now say the non-farm jobs gains were only 87,000 vs the originally reported 115,000
A summary of the employment situation:
- BLS reported: 69K (non-farm) and 82K (non-farm private). Unemployment = 8.2% (up 0.1%)
- ADP reported: 133K (non-farm private)
- Market expected: 150K to 175K (non-farm), 8.0% to 8.1% unemployment
- Econintersect‘s Forecast: 130K (non-farm private).
Non-seasonally adjusted non-farm payrolls rose 800,000 – historically the best May since the end of the Great Recession.
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) up from 14.5% to 14.8%. Econintersect has an interpretation of employment supply slack using the BLS unadjusted data base, demonstrated by the graph below.
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 improved from 58.4 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.
This month the trend rate of growth has been negative for the last two months, with job gains considered less good than gains in the last 12 months.
The bullets below use seasonally adjusted data:
- Average hours worked (table B-2) down slightly from 34.5 to 34.4. A rising number indicates an expanding economy if the employment is also rising. This month’s number declined.
- Government employment contracted 13,000 with the Federal Government down 5,000 – while state governments down 5,000 and local governments contracted 3,000.
- The big contributors to employment growth this month were various transport and warehousing (35.6K) and health care (34.0). The big drag this month was construction (-28.0k)
- Manufacturing rose 12,000.
- The unemployment rate for people between 20 and 24 (Table A-10) remained fell from 13.2% to 12.9%. This number is produced by survey and is very volatile.
- Average hourly earnings (Table B-3) rose two cents to $23.41. Even so, 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 improved year-over-year from last month, and its rate of growth shows an expanding economy.
Temporary help grew year-over-year 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.
Addendum: After publishing of this analysis, Chief economist for the National Federation of Independent Business (NFIB) William C. Dunkelberg, issued the following statement:
“May was a stagnant month for employment in the small-business sector, with the net change in employment per firm, seasonally adjusted coming in at “0”, down 0.1 from April. Seasonally adjusted, 10 percent (down 2 points) of the owners added an average of 2.6 workers per firm over the past few months, and 15 percent (up 1 point) reduced employment an average of 2.1 workers per firm. The remaining 75 percent of owners made no net change in employment.
NFIB small business jobs statementWhile the trend remained positive, May’s numbers were weaker than April’s and do not breed confidence that strong economic growth is just around the corner.
“To the surprise of many, the ability to find qualified applicants for available jobs continues to plague the small-business community. Fifty-one (51) percent of owners hired or tried to hire in the last three months and 37 percent (73 percent of those trying to hire or hiring) reported few or no qualified applicants for positions. Nineteen percent have openings for skilled workers. Firms have eased layoffs, but have not resumed strong hiring.
“The percent of owners reporting hard to fill job openings rose 3 points to 20 percent, the highest reading since June of 2008. Hard-to-fill job openings are a strong predictor of the unemployment rate so the gain in openings is a welcome development, although considering this morning’s DOL numbers, it’s clear that the impact has yet to materialize.
“The net percent planning to create new jobs rose 1 point to a net six percent planning to create new jobs. Not seasonally adjusted, 17 percent of owners plan to increase employment at their firm, down 1 point, and five percent plan reductions. This is unchanged from April suggesting that owners are still hesitant to expand.”
“The declines in construction employment seasonally adjusted seem inconsistent with the steady improvement in housing starts. Looking ahead, 21 percent plan to create new jobs, only four percent plan to reduce employment in the NFIB May survey. In manufacturing, a major contributor to what little job growth we experienced, NFIB members reported a solid increase in employment per firm, with 23 percent increasing employment by an average of three workers per firm and 13 percent reducing employment an average of 2.4 workers. The overall gain of 0.3 workers per firm is a very strong number. The wholesale trades remain “on fire,” with 10 percent of the NFIB firms adding an average of 4.8 workers per firm. More firms (13 percent) reported reductions in employment, but by an average of 2.2 workers, producing a solid gain of 0.2 workers per firm overall.
“Small-business hiring in May continued the positive trend of the past few months, but just barely.”
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.