Employment: No Surpises Except for Compensation

by Lee Adler, The Wall Street Examiner

The pundits and the market were surprised by Friday’s “stronger than expected” jobs data. We were not, but it was just dumb luck as I explain below. Here’s the calculation from my original analysis.

The BLS jobs data is based on payrolls for the week including the 12th day of the month. During that week, the real year to year increase in withholding taxes was 1.5%.  To estimate the July headline payrolls number, multiplying  July 2011 non farm payrolls of 131.407 million x 101.5% = 133.378 million. That would be an increase of 290,000  jobs versus the June number.

With everyone talking about how weak the economy is, that would be a big positive surprise.  Will the number actually come in that strong? Given the vagaries of the jobs surveys, including the fact that the rate of change in weekly average earnings could be substantially different from last month’s 2.2%,  it’s doubtful. I suspect a “beat” of some magnitude. The data will be released Friday, August 3.

So why did the headline number come in at a gain of  ”only” 163,000.  As Gomer Pile would say, “Surprise, surprise, surprise!” …Compensation inflation? Average weekly earnings rose by 3.5% year over year.  A closer inspection reveals that wage and salary inflation isn’t quite that high, but it is above the Fed’s 2% inflation preference.

Average Weekly Earnings – Click to enlargeAverage weekly hours worked were up by 1.2% percent year to year so that the part of the gain in weekly compensation attributable to inflation would be 2.3%. That reconciles with the reported average hourly earnings gain of  2.3% versus July 2011. Salaried, commissioned, and “bonused” workers  thus do not seem to have done better than the hourly working stiffs in July, as had been the case for many months previously.

Average Weekly Hours Worked – Click to enlargeThe increase in hours and earnings could be a sign that the labor market is tightening in spite of the huge numbers of people out of work. The issue may be that many of the unemployed do not possess the skills that are in demand in the market. Mortgage application takers and processors, and construction laborers generally do not make good computer game programmers. Economic pundits must face the fact that the 10 million fake jobs spawned by the bubble are not coming back. An 8.5% unemployment rate is “normal.”  The bubble unemployment rate of 5.5% was abnormal.

Using 2.3% inflation to adjust the nominal gain in withholding taxes for the reference period to “real,” the real rate of growth in withholding would have been 1.2%. A 1.2% gain in the number of jobs in July versus July 2012 would mean that there were actually fewer jobs July versus June, not 163,000 more.  A change of a couple of tenths of a percent in the inflation rate as applied in this calculation can make a huge difference in the estimate of the number of jobs thus derived. I can take no credit. My guess that the number would beat was pure serendipity! Admittedly, there were signs in both the withholding data and the claims data that the consensus estimates and the general tone of the media coverage were too pessimistic. From those readings, it was a pretty good bet that the number would be better than expected.

Ultimately, I find it difficult to give any credence at all to the monthly BLS jobs survey figures, whether it be the establishment survey from which the non farm payrolls figures are derived, or the household survey from which the unemployment rate and the full time and part time employment figures come. First, the initial release is a tiny sample, subject to revision for several months, as well as the infamous “birth-death” adjustment which tries to account for business formations and failures. Then, with seasonal adjustment, it gets worse. The SA factors are revised every year for 5 years after the fact, as the curve is constantly fit and refit as new data is added.

The bottom line is that no one really knows what the real number is and what the final SA estimate will be, and that this month’s number bears no semblance of reality. The business of ‘conomists estimating the monthly headline SA number is a shell game and an utterly meaningless con. That’s why I stick with analyzing the actual, not seasonally adjusted (NSA) data, and the withholding tax data. The revisions to the NSA data are generally minor, and tax collections are what they are. They’re fact. The BLS SA data is statistical fakery.

This month maybe I got lucky in guessing that the headline SA number would be a beat. Based on the data on earnings inflation, the number should be revised down substantially next month. The game will go on, and perhaps I’ll get lucky again next month and the absurd fantasy of a seasonally adjusted jobs number will match the reality of tax collections.  Then again, perhaps not. Caveat emptor. I give you this information for free. What it’s worth may be commensurate. That’s for you to decide. I don’t accept complaints when I guess wrong, and I don’t take credit when I guess right. I give you the best information that I can, and try to explain the data and my thinking.

So here is the real deal–a presentation of what I feel are the  important and relevant facts, as closely as they can be determined based on the actual NSA data for payrolls, employment, and first time unemployment claims. These links are to the permanent page for employment data and withholding tax collections, which is updated regularly when new data becomes available. Bookmark it for future reference.

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