Written by Steven Hansen
The June BLS jobs report was mediocre.
- the real unadjusted jobs gain comparing growth May to June was below last years growth, and low historically.
- regardless of any interpretation – mediocre jobs growth is what one would expect in the current economic climate.
- last month report was terrible, but now the BLS says the non-farm jobs gains were 105,000 vs the originally reported 69,000
A summary of the employment situation:
- BLS reported: 80K (non-farm) and 84K (non-farm private). Unemployment = 8.2% (unchanged)
- ADP reported: 176K (non-farm private)
- Market expected: 100K (non-farm), 8.1% to 8.2% unemployment
- Econintersect‘s Forecast: 145K (non-farm private).
The BLS reports seasonally adjusted data. This data is highly manipulated, and Econintersect believes the unadjusted data gives a clearer picture of the jobs situation. If Econintersect seasonally adjusted this data – the private non-farm jobs growth was 150,000.
Non-seasonally adjusted non-farm payrolls rose 815,000 – not as good as a year ago and historically mediocre for an economy in “expansion”.
Historical Unadjusted Private Non-Farm Jobs Growth Between May & June (Table B-1, data in thousands)
/images/bls non-adjusted change.PNG
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 14.8% to 14.9%.
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 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 was unchanged at 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.
The 3 year growth trend is up, and the short term trends are mixed depending on the periods selected.
Unadjusted Non-Farm Payrolls Year-over-Year Growth
The bullets below use seasonally adjusted data:
- Average hours worked (table B-2) ip slightly from 34.4 to 34.5. A rising number indicates an expanding economy if the employment is also rising. This month’s number declined. This number has been up and down in a tight range for several months.
- Government employment contracted 4,000 with the Federal Government down 7,000 – while state governments down 1,000 and local governments up 4,000.
- The big contributor to employment growth this month were temp services at 25.6K. The big drag this month was local government education at -14.2K
- Manufacturing rose 11,000.
- The unemployment rate for people between 20 and 24 (Table A-10) climbed from 12.9% to 13.7%. This number is produced by survey and is very volatile.
- Average hourly earnings (Table B-3) rose six cents to $23.50. Even so, wages growth remains in a “less good” trend.
Private Employment: Average Hourly Earnings
Economic markers used to benchmark economic growth were ok, and well away from recessionary levels.
The truck employment improved year-over-year from last month (2k), and growth in this sector shows an expanding economy.
Truck Transport Employment – Year-over-Year Change
Temporary help grew year-over-year and month-over-month (25,2K) and remains in the growth range seen during the last 6 months).
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, and this is positive also.
Chief economist for the National Federation of Independent Business (NFIB) William C. Dunkelberg, issued the following statement in advance of this data release:
“The reported net change in employment per firm over the past few months (seasonally adjusted) was -0.11, the first negative reading since last December. Seasonally adjusted, 9 percent of the owners added an average of 2.6 workers per firm over the past few months, but 12 percent reduced employment an average of 2.8. The remaining 79 percent of owners made no net change in employment. Forty-four percent of the owners hired or tried to hire in the last three months and 33 percent reported few or no qualified applicants for positions. The figures suggest that job creation has been very weak and for some owners, finding workers for the positions they do have is a challenge.
“The percent of owners reporting hard to fill job openings lost 5 points, falling to 15 percent of all owners. This was a strong reversal of May’s result and suggests the unemployment rate could rise (unless large numbers of the unemployed leave the labor force).
“Not seasonally adjusted, 10 percent plan to increase employment at their firm (down 7 points), 6 percent plan reductions, up 1 point. Seasonally adjusted, the net percent of owners planning to create new jobs fell 3 points to 3 percent, an unfortunate reversal of May’s number.
“Not seasonally adjusted, the net percent of owners planning to create new jobs was positive in the wholesale trades, manufacturing and construction. The strength in construction is most likely due to seasonal effects, although housing starts are improving and commercial activity is showing some strength. Regionally, job creation plans collapsed in New England and surged in the Mid-Atlantic states, but on balance the strength remained in states west of the Mississippi.
“The rumored hiring of 4,500 IRS agents to enforce the health care rules will certainly add to employment and GDP since our accounting rules simply assume that the value of the output produced by government workers is equal to their wage. But for small businesses, job creation will be very weak in June and plans for July look even worse, so there will be very little progress on the jobs front in the coming 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.
ADP (blue line) versus BLS (red line) – Monthly Jobs Growth Comparison
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.
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:
- 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.
Historical Monthly Jobs Growth Comparison if 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.
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.