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The folks at the St. Louis Fed – about whom I can’t say enough good things — produce a proprietary Financial Stress Index, a full explanation of which can be found here [PDF].

A full deconstruction of the Index is, frankly, a bit above my pay grade.  What’s not, though, is exploring the correlation of the Index to the S&P500 and discovering that while it’s generally well-correlated, that correlation has increased dramatically since the recession began at the end of 2007, as can easily be seen in the chart above.  (I’ve inverted the S&P500 to better display the correlation.)

The question I need to explore, of course, is whether — or how — this information might be useful in the context of equity exposure.

Note that the Index can dip below zero, and that it is still well off its lows.  Should “financial stress” continue to ease — the Index is updated weekly — it would suggest to me more S&P upside.  The biggest caveat, of course, is that all correlations work — until they don’t.

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BR: I would add that peaks in economic activity precede recessions — they start with economic stress rather low. So if we extrapolate from the (very limited data) above, we still have 12-24 months before the real heavy stuff starts coming down.

That said, 2 is not a statistically significant sample

Another terrific set of charts from the Time’s Floyd Norris:

“The economic recovery that has followed the end of the 2007-9 recession may be properly named the private enterprise bounce. While the overall recovery is comparable to recoveries after the two previous recessions, this one has been pushed higher by rising private investment and hiring, and held back by cuts in government spending and hiring.”

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click for larger chart

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Source:
A Recovery With Business Stepping Out in Front
FLOYD NORRIS
NYT, February 10, 2012
http://www.nytimes.com/2012/02/11/business/economy/a-recovery-with-business-out-front.html

Chicago Fed Letter. “Explaining the Decline in the U.S. Labor Force Participation Rate,” by Daniel Aaronson, Jonathan Davis and Luojia Hu. March 2012, Number 296. (PDF)

Barry has been crushing the BLS flat-earthers the past few days.

Resistance, however, is futile.  Try as I might not to opine on the 1.2-million-one-month-drop-in-the-labor-force, I cannot help but spill a few pixels of my own.  So here goes.

Let’s start with last month’s BLS Employment Situation release.  It contained a box, on Page 4 (of the PDF), that included the following heading and text (emphasis mine):

Upcoming Changes to the Household Survey

Effective with the release of The Employment Situation for January 2012 scheduled for February 3, 2012, population controls that reflect the results of Census 2010 will be used in the monthly household survey estimation process. Historical data will not be revised to incorporate the new controls; consequently, household survey data for January 2012 will not be directly comparable with that for December 2011 or earlier periods. A table showing the effects of the new controls on the major labor force series will be included in the January 2012 release.

So right there, in black and white, BLS explicitly told its users that January 2012 and December 2011 (and earlier) simply would not be comparable — and that would obviously be the case notwithstanding how the various numbers broke.

Overlooking that caveat is one thing, I guess.  Being corrected all over the web and then not correcting and/or retracting is something else altogether.

ADDING:  For what little I’m sure it’s worth, whenever I have had a question about an economic release — and that’s dozens (hundreds?) of times — I have picked up the phone and inquired directly of the issuing agency.  Guess what?  They’ve always been happy to help.  Point being, there’s no need to go out with bad information or run your mouth when you have doubts.  Of course, this will be of no comfort to the tin-hatters who claim the agencies are in the bag.

Source:
December 2011 Employment Situation
BLS Employment Situation News Release, Friday, January 6, 2012
USDL-12-0012

Yesterday, I went into some detail as to why a few people got the NFP data so (disingenuously) wrong. Then Invictus pointed me to this Economic Populist post, titled, Getting It Wrong on the BLS Employment Report. It came out late on Friday, hence why it may have been overlooked.

The long term chart via FRED shows the impact the Census has every 10 years on the civilian population. As you can see in the first chart below, this baseline adjustment to population is about 25% larger than 1989′s, but 35% smaller than 1999′s:

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Decennial Change Reflecting BLS incorporating Census Readings

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The next chart shows the BLS annual population benchmark to make sure their models reflect the latest estimates of population size, growth and characteristics. Note the monthly change between December and January every year — that is the yearly population adjustments.

These are not month-over-month changes, they reflect the adjustments made for the prior year showing up all at once in the month of January.

Hence, to quote the Economic Populist, “it is statistically invalid to compare December to January monthly changes. You simply cannot compare a change of a month, when one of those month’s includes a year of population adjustments.”

Annual Change in BLS Population Measures

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Anyone who thinks that 1.2 million people suddenly dropped out of the labor force needs to take a basic statistics course. I wont hold my breath waiting for the usual suspects to admit their errors.

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Source:
Getting It Wrong on the BLS Employment Report
Robert Oak
Economic Populist Fri, 02/03/2012 – 21:46,
http://www.economicpopulist.org/content/getting-it-wrong-bls-employment-report

Today’s Employment chart madness from Ron Griess of the Chart Store.
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Click to enlarge:

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More charts after the jump

Read the rest of this entry »

Last week, I went into the details of the NFP report (See Tearing Apart January 2012 NFP data). There were 10 positive bullet points versus 5 negatives — and even those negatives were the same old sore spots (high teen and minority unemployment, persistent long term joblessness, etc.) that have been plaguing the labor market for some time now.

For the past decade, I have been very diligently tearing apart the monthly jobs data with a statistician’s eye: I have discussed the importance of the overall trend versus any one point in time; I have emphasized how far off the Birth Death adjustment becomes at the end of each economic cycle (not the beginning); we reconciled the differences between Household and Establishment surveys; urged the media to report both Unemployment (U3) and Underemployment (U6), and lastly, noted that flat wages are even worse than reported thanks to the Fed/BLS tendency towards focusing on Inflation ex inflation.

I mention these bonafides because I am no sycophant when it comes to BLS data. I have long urged a healthy skepticism, and have tried to look beneath the headlines (perhaps if there is interest, I may post a guide to various ways to read BLS employment data).

However, after Friday’s solid NFP release, some unusual — and to be blunt, quite silly — commentary was about the intertubes. Quite frankly, it embarrassed its authors, whom I would categorize into three distinct cliques: The PermaBears, the Political Knaves, and the Consistently Wrong (some people belong in more than one category).

ZeroHedge has been a terrific site when it comes to CDOs, HFT and other challenging aspects of financial complexities. That’s what makes it so difficult to understand why they completely shit the bed with the BLS census adjustment  (Record 1.2 Million People Fall Out Of Labor Force In One Month, Labor Force Participation Rate Tumbles To Fresh 30 Year Low).

Good analyst, bad analysis.

Understand what this Census adjustment actually is: BLS takes the decennial census, and adjusts its estimates for total population, work force, and employed, and does so for a variety of demographic factors. No, it is not that the non-institutional population suddenly rose by 1.7 million month-over-month, and therefore the labor force suddenly lost a million people. Rather, this reflects a “frame of reference” revision incorporating the latest census data.

Don’t take my work for it, here is what the conservative American Spectator said:

“I don’t want to overstate the significance of [Zero Hedge's] oversight, which conservative voices around the media and the web are also making, namely the idea that the participation rate dropped 0.3 percent and the labor force dropped more than 1.2 million in the past month. Those things are simply not true no matter how loudly people scream “conspiracy” and “propaganda.” (Having been trading financial markets for about 25 years, I’ve heard these same accusations about economic data being manipulated to help the incumbent president — whether Democrat or Republican — so many times, they just bore me now.)”

This error was immediately picked and amplified by CNBC’s Rick Santelli, who was one of the Tea Party’s founding fathers. Santelli has been dead wrong about NFP the past 6 months (or longer). From the floor of the Chicago Exchange, he has underestimated Employment data month after month without correction or remorse. I haven’t teased apart everyone of his calls, but it seems that he has been consistently on the wrong side of the data since the late Spring. Perhaps The Daily Show might like to take a look at his prognostication skills.

File Santelli under the category Political Knave, along with James Pethokoukis. Jimmy P was once a good economics reporter, but he has allowed his political bias to consume him. It is a shame, because he has a good mind and a head for numbers — but since his joining the Kudlow brigade of hard right touts, his work like Why the official 8.3 percent unemployment rate is a phony number—and what it means for Obama’s reelection is not worth the effort to separate the valuable analysis from the politcial hackery.

Lastly, there are those who have been simply wrong. I have to throw Charles Biderman under the bus here. He has been so consistently wrong over the past 4 years it has been rather astonishing. He utterly missed the signs of the crisis in 2007-08, denied the recession deep into it, and then missed the turn in 2009-10. (If there is interest, I might post his major  calls).

Biderman actually complained that — WTF!?! — all of the gains were due to seasonal adjustments in January. This has to be one of the single most clueless economic statements I have ever read. Of course there are massive seasonal adjustments in January! There is a huge hiring surge in November and December — primarily retail sales and shipping — which is unwound in the New Year. This occurs annually, mostly due to a little-known holiday you might have heard of called Christmas.

Ignore the economic foolishness of the biased political hacks and perma-bears. If you want an excuse to be cautious on the markets, then look at the mixed earnings near a cyclical peak, the overbought condition of indices, and the headaches in Europe. There are always plenty of reasons to be concerned and worried — but the January NonFarm payrolls isn’t one of them.

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Previously:
Tearing Apart January 2012 NFP data (February 3rd, 2012)

No Rick Santelli and Zero Hedge, One Million People Did Not Drop Out of the Labor Force Last Month (February 3rd, 2012)

While perusing various articles on the Employment Situation Summary that was released yesterday (2/3/2012), I came across this transcript from the Rush Limbaugh radio show where Rush decides essentially that we shouldn’t bother with the seasonally adjusted numbers and only look at the raw (NSA) job creation number from the Establishment Survey (likely because this number is negative and thus “bad” for Obama). What Rush says is:

“That’s part of this two and half million fewer jobs. Are you hearing me on this, folks? It is corrupt as it can be. Well, now, the wait a minute, though. There’s nothing new here in the seasonal adjustment. Normally we never talk raw numbers. Nobody ever reports or talks about raw numbers. I happened to see today the raw numbers, and little red flags are going up, my curiosity is being piqued here. And then I see that the labor force participation rate, 1.2 million people dropped out of the labor force in one month, and it happens to be December to January.”

What exactly are are these “red flags” Rush? These is a very good reason we have seasonal adjustments and more importantly, there is very good data on just how big the January adjustments typically are. What follows is is the “raw data” for January job reports going back to 1983 (the first year of the recovery from the 81 recession to pick an arbitrary date):

Notice a pattern here Rush? You see, every January many people get laid off regardless of underlying economic conditions. It is a very predictable and very consistent pattern (not one year with fewer than 1.49 million job losses), hence the seasonal adjustment. The BLS adjusts most months (although some adjustments are larger than others). For instance, last year, the “raw numbers” for February were +821,000 jobs, for March were +913,000 jobs, and April were +1,179,000 jobs, but obviously the seasonal adjustments took those numbers down considerably. So Rush, I am going to issue a challenge to you. I am going to challenge you to quote only the “raw numbers” for job creation every month this year, right up to the election, since you don’t trust the seasonal adjustments. I am going to take a guess and say that you won’t take me up on the challenge and instead will likely just pick and choose which number to use based on what is worse for Obama, but maybe there is a hint of journalistic integrity somewhere in your body.

Also Rush, since you decided to quote Zero Hedge regarding the “1.2 million people that dropped out of the labor force in January” (you do realize that Tyler Durden isn’t a real person right?), I have decided to correct you on that point as well since I am already writing to you. That 1.2 million increase in those not in the labor force is an adjustment that the BLS applied based on actual data from the 2010 census. Essentially, since the census provides more exact numbers on the population statistics every 10 years, the BLS adjusts their estimates that were made in the intervening period (ie 2001-2010), but since the census doesn’t break down monthly changes, the BLS simply applies the adjustment in one month (ie this January), which they clearly pointed out in the report. Conveniently, the BLS also provided a very nice table that showed what the December 2011-January 2012 change in the adjusted categories would have been without the once a decade adjustment. The actual change (without the revisions) from December to January in those “not in the labor force” was only -75,000. I wrote a post on this yesterday to correct both Zero Hedge and Rick Santelli, who made the same reading comprehension mistake that you succumbed to. And in case you just don’t want my word on it, you can go to Calculated Risk for another take on it.

I hope this brief summation helped you understand a little bit more about the seasonal adjustment and the once a decade census adjustment, but if not, feel free to contact me, I’d be happy to have more discourse with you on the subject.

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SilverOz is an MPA specializing in local economic development and have worked in local economic development for a mid-sized midwestern county for over 10 years.  He has personally worked on/managed projects that have totaled over $500 million in direct investment into the county.

SilverOz is an MPA specializing in local economic development and have worked in local economic development for a mid-sized midwestern county for over 10 years.  He has personally worked on/managed projects that have totaled over $500 million in direct investment into the county.

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So today following an otherwise pretty darn good jobs report, we get the usual perma-pessimists at Zero Hedge and Rick Santelli over at CNBC proclaiming that the report showed a drop of over 1 million people from the labor force in one month. Of course, as ususal, both Santelli and Zero Hedge have a real reading comprehension problem and completely missed that this million+ people isn’t some new January phenomenon, but a result of the BLS using the 2010 census data to have more accurate data. In other words, the changes in the Household Survey to the various measures had taken place over the years prior to 2010, but for simplicity’s sake, the BLS incorporates these changes into one month (which they clearly point out). The relevant text from the report is below (bold is mine):

“Effective with data for January 2012, updated population estimates which reflect the results of Census2010 have been used in the household survey. Population estimates for the household survey are developed by the U.S. Census Bureau. Each year, the Census Bureau updates the estimates to reflect new information and assumptions about the growth of the population during the decade. The change in population reflected in the new estimates results from the introduction of the Census 2010 count as the new population base, adjustments for net international migration, updated vital statistics and other information, and some methodological changes in the estimation process. The vast majority of the population change, however, is due to the change in base population from Census 2000 to Census 2010.

In accordance with usual practice, BLS will not revise the official household survey estimates for December 2011 and earlier months. To show the impact of the population adjustment, however, differences in selected December 2011 labor force series based on the old and new population estimates are shown in table B.

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.”

So Rick/Zero Hedge, unless you would like to argue that the population of the United States also grew by 1.5 million in one month (since that is from the exact same report/revision you quoted), I think both of you should retract your extremely misleading statements about those not in the labor force increasing by over a million in January and simply admit that you are either too stupid or too focused on selling a particular world view to read the data correctly.

At the very least, a reputable financial news organization like CNBC needs to set the record straight on data like this as while Mr. Santelli is entitled to his own opinion, he is not entitled to his own facts, and the fact is 1 million people did not drop out of the labor force in January 2012.

Despite the cries of the permabears and Rick Santelli, this was unequivocally a strong NFP report. The headline numbers were 243,000 net jobs, as unemployment dipped to 8.3%. The Labor Pool increased — suggesting that the improvement was not the usual employee retirement and discouraged worked giving up looking for work.

When we go beneath the headlines, we usually see the data’s warts — not this time. Across the board this was a surprisingly strong report. BLS called described job growth as “widespread in the private sector, with large employment gains in professional and business services, leisure and hospitality, and manufacturing.”

As noted earlier, no single month matters as much as the overall trend — and the trend is unequivocally upwards for the better part of 3 quarters now.

Lets go to the details:

• Total nonfarm payroll employment rose by 243,000 in January. Private-sector employment grew by 257,000;
• Unemployment rate declined by 0.2 percentage points in to 8.3%; Its down by 0.8 point since August.
• The Household survey, used to measure Unemployment rate, added a whopping 491,000 jobs.
• The number of unemployed persons declined to 12.8 million, from over 16 million at the recession peak.
• Employment-population ratio rose to 58.5% in January (Seasonally adjusted)
• The average workweek for production and nonsupervisory employees on private nonfarm payrolls edged up by 0.1 hour to 33.8 hours.
• Average workweek for all employees was unchanged in January, but the manufacturing workweek increased by 0.3 hour to 40.9 hours (likely multi shift auto mfr); Factory overtime increased by 0.1 hour to 3.4 hours.
• Average hourly earnings for all private employees rose by 4 cents (0.2%) to $23.29. Over the past 12 months, average hourly earnings have increased by 1.9%
• November NFP was revised from +100,000 to +157,000; December NFP was revised from +200,000 to +203,000.
• Benchmarks were also revised upwards — as of December 2011, total employment was raised by 266,000 (231,000 NSA)

The Negatives?

• Unemployment rates for teenagers 23.2%; for blacks is 13.6%; Hispanics 10.5%
• Long-term unemployed (jobless for 27 weeks +) was little changed at 5.5 million — thats 42.9%
• Persons employed part time for economic reasons, at 8.2 million, changed little in January; 2.8 million persons were marginally attached to the labor force, and 1.1 million discouraged workers, essentially unchanged from a year earlier.
• Employment in information declined by 13,000, including a loss of 8,000 jobs in the motion picture and sound recording industry
• Employment in construction increased by 21,000 in January, likely a temporary blip caused by unusually warm weather — 206,000 people were unable to work due to weather, well below normal for this time of year.

The one dark spot is the nagging, persistently long-term unemployment data. I suspect that is as much due to secular trends than cyclical recovery and is unlikely to improve anytime soon.

All told, its tough not to like this NFP report. Markets surely do, with the Dow up 140.

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Sources:
Employment Situation Summary
BLS, Friday, February 3, 2012

Did Economy Really Create 500,000 Jobs?
Real Time Economics February 3, 2012
http://blogs.wsj.com/economics/2012/02/03/did-economy-really-create-500000-jobs/