February 2020 BLS Jobs Situation Again Shows Significant Improvement

Written by Steven Hansen

The headline seasonally adjusted BLS job growth was well above expectations.

• The year-over-year rate of growth for employment improved this month (red line on the graph below). The year-over-year growth rate is below the rate of growth one year ago. This is a year-over-year analysis which has no seasonality issues.

• Economic intuitive sectors of employment mixed.
• This month’s report internals (comparing household to establishment data sets) did not correlate with the household survey showing seasonally adjusted employment grew 45,000 vs the headline establishment number expanding 273,000. 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 job growth – and if they do not match, your confidence in either survey is diminished. [note that the household survey includes ALL job growth, not just non-farm).
• The household survey removed 60,000 people to the labor force which explains the improvement in the unemployment rate.
• The National Federation of Independent Business (NFIB)’s monthly Jobs Report is at the end of this post.

Per Claudine Zachara, Co-Founder, COO and President of ThinkWhy:

The first two months of 2020 have now seen tremendous job gains. February’s numbers continue to prove a strong U.S. economy. However, the recent volatility in the stock market due to Covid-19 fears is understood, as the real question going forward is how much impact will businesses absorb due to the disruption of the supply of labor, goods and services.

A summary of the employment situation:

• BLS reported: 273K (non-farm) and 228K (non-farm private). The headline unemployment rate declined from 3.6 % to 3.5 %.
• ADP reported: 183K (non-farm private)
• In Econintersect‘s February 2020 economic forecast released in late January 2020, we estimated non-farm private payroll growth at 70,000 (based on economic potential) and 150,000 (fudged based on current overrun / under-run of economic potential).
• The market expected (from Econoday):

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

The following chart compares the job gains/losses this month with the same month historically – this is the best month for job growth since 2018.

Year-to-date unadjusted employment growth is 137,000 people above the pace of last year – and the best year-to-date growth since 2018.

The last month’s headline employment gains were revised up. Generally speaking, the INITIAL employment gain estimate is overstated when the economy is slowing and understated when the economy is accelerating.

Concentrating on the labor force growth Vs. employment growth – it should be noted that the trend shows that the slack between labor force growth and employment growth is narrowing slowly. This trend indicates we are very slowly nearing full employment.

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

Unemployment

The BLS reported U-3 (headline) unemployment was 3.5 % with the U-6 “all-in” unemployment rate (including those working part-time who want a full-time job worsened from 6.9 % to 7.0 %. 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 worsened from 61.2 to 61.1

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 the household survey.

• Econintersect uses employment-population 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 job growth was around 150,000 – as this is approximately the new entries to the labor market caused by population growth.
• The growth in employment since the Great Recession has been in full-time jobs.

Employment Metrics

The growth trend in the establishment survey’s non-farm payroll year-over-year growth rate was trending up in 2018. The year-over-year growth rate is declined in 2019 but is better in 2020.

Unadjusted Non-Farm Payrolls Year-over-Year Growth

Another way to view employment is to watch the total hours worked where trends vary based on periods selected.

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) improved from 34.3 to 34.3. A rising number normally indicates an expanding economy.
• Government employment grew 45,000 (45K) with the Federal Government up 8K, state governments up 18K and local governments up 19K.
• The big contributor to employment growth this month was government (45K) leisure and hospitality (51K), health care/social services (56.5K), and construction (42.0K)
• Manufacturing employment up 15K and construction grew 42K.
• The unemployment rate (from the household survey) for people between 20 and 24 (Table A-10) improved from 6.6 % to 6.4 %. This number is produced by a survey and is very volatile.
• Average hourly earnings (Table B-3) was up $0.09 to $28.52

Private Employment: Average Hourly Earnings

Economic Metrics

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

The truck employment was up 1.7K

Truck Transport Employment – Year-over-Year Change

Temporary help was down 3.3K.

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 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 historically low.

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)

National Federation of Independent Business (NFIB)’s monthly Jobs Report Statement:

Small business owners are supporting a strong small business labor market with solid hiring, elevated levels of open positions, and higher employee compensation in February, according to NFIB’s monthly jobs report. Owners added an average addition of 0.43 workers per firm, adding to a strong first quarter of 2020.

Finding qualified workers remains the top problem for owners, with 25% reporting this as their No. 1 problem. In construction, 45% cited the shortage of qualified labor as their top business problem and in manufacturing, 33%. The lack of qualified labor is constraining growth in these sectors.

“The labor shortage remains one of the biggest obstacles to a more robust small business economy,” said NFIB Chief Economist Bill Dunkelberg. “The lack of workers has slowed certain sectors like construction, manufacturing, and transportation. But overall, the economy is strong and growing at a good pace.”

Thirty-eight percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, up 1 point. Thirty-three percent reported openings for skilled workers (up 3 points) and 11% have openings for unskilled labor (down 3 points). Thirty-four percent reported few qualified applications for their open positions and 18% reported none. Reports of “few or no qualified applicants” were high in construction (65%), manufacturing (53%), and retail (52%).

Up from January, 15% of owners reported increasing employment and average of 1.6 workers per firm and 2% (down two points) reported reducing employment an average of 4.9 workers per firm (seasonally adjusted).

A net 21% of owners (seasonally adjusted) plan to create new jobs, up two points. Twenty-eight percent plan to increase total employment at their firm, and 1% plan reductions. In construction, 38% plan to increase their employment and 0% plan reductions.

In attempting to fill open positions, a historically high percentage of owners’ plan to raise their employee’s compensation. A net 36% (seasonally adjusted) reported raising compensation and a net 19% plan to do so in the coming months.

Click here to view the entire NFIB Jobs Report. For more information about NFIB, please visit NFIB.com. 

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.

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.

ADP (blue line) versus BLS (red line) – Monthly Jobs Growth Comparison

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 seasonally 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 job 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 an estimated 140k – 160k. The number might possibly be within the range 125k – 175k. Econintersect cannot find a 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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