January 2012 BLS Jobs Up 243,000, Unemployment Down to 8.3%

If you thought December 2011 employment was good, you will love January 2012.  A summary of the January 2012 BLS employment situation:

The changes in the data have a lot of asterisks, and Econintersect‘s discussion this month is more complex than normal due to BLS revisions.  Unfortunately, Econintersect does not view this report as wonderful as it appeared at first glance, but it remains the best January Jobs Report in the last 6 years.

Non-seasonally adjusted non-farm payrolls fell 2,689,000 (see caveats below).  This in line with non-recession Januarys.

So a reader can compare, these are the BLS seasonally adjusted job changes for Januarys.

2003 95
2004 162
2005 137
2006 283
2007 236
2008 41
2009 -818
2010 -40
2011 110
2012 243

The takeaway is an inconsistent seasonal adjustment.  This clouds our understanding of the data.

The red arrow shows the four month improvement trend for employment gains.  Not drawn is a nine month improvement trend which is not so visually obvious due to the high number for September.

Note that the BLS “updated” its Establishment survey data as a result of the annual benchmarking process and the updating of seasonal adjustment factors. In addition, household survey data for January 2012 reflect updated population estimates which would effect unemployment views.

The adjustment increased the estimated size of the civilian noninstitutional population in December by 1,510,000, the civilian labor force by 258,000, employment by 216,000, unemployment by 42,000, and persons not in the labor force by 1,252,000. Although the total unemployment rate was unaffected, the labor force participation rate and the employment-population ratio were each reduced by 0.3 percentage point. This was because the population increase was primarily among persons 55 and older and, to a lesser degree, persons 16 to 24 years of age. Both these age groups have lower levels of labor force participation than the general population.

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).

Looking below the headlines using seasonally adjusted data:

  • In the latest BLS report employment-population ratio was unchanged at 58.5. The employment-population ratio tells you that the population with a job grew at the same rate as population growth.   Each 0.1% is approximately 300,000 jobs. [Note: these are seasonally adjusted numbers – and we are relying on the BLS to get this seasonal adjustment factor correct]. This unchanged ratio is telling you that jobs growth was around 160,000 – as this is approximately the new entries to the labor market caused by population growth.
  • Econintersect does not like the BLS methodology of determining unemployment – only participation rates or employment-populations ratios tell you what is really going on with unemployment. But for those who like to read this the headline U-3 unemployment rate contracted from and upwardly revised 8.5% to 8.3%.  The Household survey grew the population 0.3% and grew the employed ranks by 0.6%.  Note that the Establishment Survey (which is the basis of the employment gains) and the Household Survey (which is the basis of the unemployment rate) numbers do not align.
  • The U-6 “all in” unemployment rate (including those working part time who want a full time job) rose declined from 15.2% to 15.1%.
  • Average hours worked (table B-2) remained unchanged at an upwardly revised 34.5. A rising number indicates an expanding economy if the employment is also rising.
  • Government employment contracted 14,000 with the Federal Government contracting 6,000 – while state governments grew 3,000 and local governments were contracting 11,000.
  • The big contributors to employment growth this month were construction (21K), manufacturing (50k), trade and transportation (37K), various administrative services (70K), health care (31K), and food/drink services (33K).  The big drags this month were government (-14K) and clothing stores (-14K).
  • Economic markers used to benchmark economic growth were up. The transport sector employment was up 0.3% month-over-month.   The support services industry (including temporary help) was also improved 0.4% month-over-month. Econintersect believes the transport sector is a forward indicator. Others look at temporary help as a forward indicator, and this is positive also.
  • Manufacturing rose 50,000 and construction rose 21,000.
  • The unemployment rate for people between 20 and 24 (Table A-10) fell dramatically from 14.4% to 13.3%.
  • Average hourly earnings (Table B-3) rose slightly from an upwardly revised $23.25 to $23.29.

Please refer to Challenger Job Cut Report Shows (Normal?) Seasonal Jump for the statement from outplacement agency Challenger talking about the jump in layoffs in January 2012.

NFIB Jobs Statement

Chief economist for the National Federation of Independent Business (NFIB) William C. Dunkelberg, issued the following statement on January small business job growth:

“The Bureau of Labor Statistics announced a drop in the unemployment rate this morning.  Unfortunately, few of these jobs are being created on Main Street.

“For small employers, the net change in employment per firm (seasonally adjusted) was zero (0.0) While that’s an increase over December, it’s hardly a net new jobs winner. Seasonally adjusted, 11 percent of the owners added an average of 3.0 workers per firm over the past few months, and 11 percent reduced employment an average of 2.9 workers per firm. Not to put too fine a point on it, but current employment changes are barely ‘breaking even’.

“Forty-one percent of small-business owners hired or tried to hire, but 31 percent of them reported few or no qualified applicants for positions. The percent of firms reducing employment was the lowest since October of 2006 when it was nine percent, but the percent of those increasing employment was also one of the lowest readings in that period. Firms have stopped firing (initial claims for unemployment are averaging 375,000 per week), but at only 11 percent, they have not resumed hiring enough to make any significant dent in the economic void created by the recession.

“The percent of owners reporting hard to fill job openings rose 3 points to 18 percent, the highest level since June 2008 when it was at 21 percent. This is a good predictor of the unemployment rate and affirms a small decline in the rate.

“The net percent of owners planning to create new jobs fell one point to five percent (seasonally adjusted), the third decline in a row, and not a strong reading. In a decent expansion, this indicator should be in double digits. Unadjusted, 13 percent plan to increase employment and seven percent plan reductions. Translation: minimal job creation overall. From the start of the expansion in July 2009, job creation plans have lagged all other recovery periods, including the ‘jobless recovery’ in 2001 where employment losses were relatively small.

“Overall, the January NFIB survey anticipates a relative weak job creation number with a small decline in the unemployment rate. The indicators are improving, but at a glacial pace. Winter continues.”

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’s 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.

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 have 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 uses employment / population ratios to determine the number which is between 140,000 and 160,000 – based on historical employment / population ratios. The graph below uses the historical employment-population ratios to show jobs growth per month needed to match population growth.  The numbers are normalized to a population base of 300 million.

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.

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All Employment Articles

2003 95
2004 162
2005 137
2006 283
2007 236
2008 41
2009 -818
2010 -40
2011 110
2012 243