BLS Jobs Situation Improved In March 2016. Weakness In Economically Intuitive Sectors.

Written by Steven Hansen

The BLS job situation headlines looked good. Jobs growth accelerated this month on the back of last month’s downwardly revised data. Economic intuitive sectors were mixed.

• The rate of growth for employment accelerated this month (red line on graph below).

Unadjusted Non-Farm Private Employment – Year-over-Year Change (blue bars – left axis) and Year-over-Year Growth Acceleration / Deceleration From Previous Month (red line – right axis)

z bls2.png

• The unadjusted jobs increase month-over-month was average for times of economic expansion.
• This month’s data is not quite as good as it seems as last months gains were revised downward.
• Economic intuitive sectors of employment were mixed.
• This month’s report internals (comparing household to establishment data sets) was fairly consistent with the household survey showing seasonally adjusted employment growing 246,000 vs the headline establishment number of growing 215,000. The point here is that part of the headlines are from the household survey (such as the unemployment rate) and part is from the establishment survey (job growth). From a survey control point of view – the common element is jobs growth – and if they do not match, your confidence in either survey is diminished. [note that the household survey includes ALL jobs growth, not just non-farm).
• The household survey added 396,000 people to the workforce.

A summary of the employment situation:

• BLS reported: 215K (non-farm) and 195K (non-farm private). Unemployment rate worsened from 4.9% to 5.0%.
• ADP reported: 200 K (non-farm private)
• In Econintersect‘s March 2016 economic forecast released in late February, we estimated non-farm private payroll growth at 130,000 (based on economic potential) and 210,000 (fudged based on current overrun of economic potential);
• NFIB comments on this Jobs Report is towards the end of this post.
• The market expected (from Bloomberg):

The BLS reports seasonally adjusted data – manipulated with multiple seasonal adjustment factors, and Econintersect believes the unadjusted data gives a clearer picture of the jobs situation.

Non-seasonally adjusted non-farm payrolls improved 776,000 – better than last year but average for March’s in times of economic expansion.

Historical Unadjusted Private Non-Farm Jobs Growth Between Februarys and Marchs (Table B-1, data in thousands) – unadjusted (blue line) vs seasonally adjusted (red line)

bls non-adjusted change.PNG

Last month’s employment gains were revised downward.

Change in Seasonally Adjusted Non-Farm Payrolls Between Originally Reported (blue bars) and Current Estimates (red bars)

z bls1.png

Most of the analysis below uses unadjusted data, and presents an alternative view to the headline data.

Unemployment

The BLS reported U-3 (headline) unemployment was 5.0 % with the U-6 “all in” unemployment rate (including those working part time who want a full time job) worsened from 9.7% to 9.8%. These numbers are volatile as they are created from the household survey.

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 employment-population ratio, demonstrated by the graph below. The employment-population ratio improved 0.1 to 59.9.

Employment-Population Ratio

The jobs picture – when the employment / population as a whole – has been on an uptrend since mid-2011. This ratio is determined by household survey.

• Econintersect uses employment-populations ratios to monitor the jobless situation. The headline unemployment number requires the BLS to guess at the size of the workforce, then guess again who is employed or not employed. In employment – population ratios, the population is a given and the guess is who is employed.
• This ratio has been in a general uptrend since the beginning of 2014. 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.

Employment Metrics

The growth trend in the establishment survey’s non-farm payroll was trending up beginning of 2014 but has been trending down beginning in 2015. This month there was an improvement.

Unadjusted Non-Farm Payrolls Year-over-Year Growth

Another way to view employment is to watch the total hours worked.

Percent Change Year-over-Year Non-Farm Private Weekly Hours Worked

The bullets below use seasonally adjusted data from the establishment survey except where indicated:

• Average hours worked (table B-2) was unchanged at 34.4. A rising number normally indicates an expanding economy .
• Government employment grew 20,000 (20K) with the Federal Government up 2K, state governments down 1K and local governments up 19K.
• The big contributor to employment growth this month was leisure and hospitality (40.0K), health care and social assistance (44.0K), and retail trade (47.7K).
• Manufacturing was was down 29K, and construction was up 37K.
• The unemployment rate (from household survey) for people between 20 and 24 (Table A-10) improved from 8.6% to 8.4%. This number is produced by survey and is very volatile.
• Average hourly earnings (Table B-3) was was up $0.07 to $25.43.

Private Employment: Average Hourly Earnings

Economic Metrics

Economic markers used to benchmark economic growth (all from the establishment survey).

The truck employment was down 2.4K.

Truck Transport Employment – Year-over-Year Change

Temporary help improved 4.0K.

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.

Food for Thought

Who are the victims in this mediocre employment situation. It is not people over 55.

Index of Employment Levels – 55 and up (blue line), 45 to 54 (red line), 35 to 44 (green line), 25 to 34 (purple line), 20 to 24 (light blue line), and 16 to 19 (orange line)

Women are doing better than men.

Index of Employment Levels – Men (blue line) vs Women (red line)

Mom and Pop employment remains below recessionary levels.

The less education one has, the less chance of finding a job.

Index of Employment Levels – University graduate (blue line), Some college or AA degree (orange line), high school graduates (green line), and high school dropouts (red line)

Here is an indexed view of employment levels.

Index of Employment Levels (from the BLS Establishment Survey) – Hispanic (blue line), African American (red line), and White (green line)

However, keep in mind that population growth is different for each group. Here is a look at employment to population ratios which clearly shows NO group has recovered from the Great Recession:

Employment / Population Ratios (from the BLS Household Survey) – Hispanic (blue line), African American (red line), and White (green line)

NFIB comment on this Month’s BLS Job Situation

NFIB’s chief economist William C. Dunkelberg, issued the following comments on NFIB’s January 2016 Jobs Report:

Job creation improved in January and small employers are paying more in order to attract good employees in a tightening labor market, according to the January 2016 Jobs Report released today by theNational Federation of Independent Business.

“The percentage of owners citing difficulty finding qualified workers as their ‘Single Most Important Business Problem’ remained unchanged at 15 percent for the third month in a row,” said NFIB Chief Economist William C. Dunkelberg. “That makes it the third biggest problem for small business owners behind taxes and regulations and red tape, the highest reading since 2007. Employers are paying more in order to attract and keep good employees.”

The average employment gain per firm rose to 0.11 from -0.07 workers in December. Twenty-nine percent of all owners reported job openings they could not fill, which is up 1 point and at the highest level for this expansion. A seasonally adjusted net 27 percent of owners reported raising workers’ compensation, up 5 points and the highest level since late 2007.

Dunkelberg predicts that the January jobs number will be in the low 200,000 range and the unemployment rate will see a reduction.

NFIB SMALL BUSINESS JOBS REPORT

The NFIB Research Foundation has collected Small Business Economic Trends data with quarterly surveys since 1974 and monthly surveys since 1986. Survey respondents are drawn from NFIB’s membership. The survey was conducted in January 2016 and reflects the responses of 1,438 sampled NFIB members.

SMALL BUSINESS JOB CREATION AND COMPENSATION CLIMB IN JANUARY

Pressure from tighter labor market raises workers’ pay

NFIB’s chief economist William C. Dunkelberg, issued the following comments on NFIB’s January 2016 Jobs Report:

There was a slight uptick in March’s data, but small business owners are still not hiring at a sufficient pace. The numbers suggest that employment gains will continue to be modest and just enough to keep the unemployment rate steady.

The average employment change during the month of March increased to 0.02 workers per firm. The gain was positive, but not by much. Forty-eight percent of small business owners reported that they were hiring or trying to hire, while 41 percent reported no qualified applicants for the positions that they were trying to fill.

For several months, owners have reported that finding qualified workers is the third ‘Single Most Important Business Problem’ behind taxes and government regulations and red tape. Workers are being disqualified for positions because of their social skills, appearance, and attitude as often as poor work history and a lack of specific skills.

Twenty-five percent of all owners reported job openings that they could not fill in the current period. This is a decent reading historically, but it is the second monthly decline suggesting that labor market tightness has faded. Down 1 point from February and 6 points from December, a seasonally adjusted 9 percent of owners plan to create new jobs. Owners that are raising compensation remained the same at 22 percent and the net percent planning to increase compensation rose 4 points.

Even with a minor gain, the March jobs numbers are not promising.

The March jobs number will remain weak, close to the 200,000 mark with no progress on the unemployment rate.

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:

1. 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.
2. The report is revised to reflect additional responses over the next two months.
3. There is an adjustment to account for job creation — much maligned and misunderstood by nearly everyone.
4. 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. However, ADP is using a new methodology beginning with the October 2012 data – and only time will tell if their new approach was as good as their old one.

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 nor 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 January.

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:

• In Econintersect‘s June 2014 economic forecast released in late May, we estimated non-farm payroll growth at 160,000 (unadjusted based on economic potential) and 229,000 (fudged based on current overrun of economic potential).
• 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.

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