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)
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:
>
Decennial Change Reflecting BLS incorporating Census Readings
>
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
>
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.
>
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.
>
Click to enlarge:
˜˜˜
˜˜˜
˜˜˜
˜˜˜
~~~
~~~
More charts after the jump
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.
>
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)
A little tongue-in-cheek wonkery on NFP from Barron’s:
“The Labor Department reported that 243,000 folks were added to nonfarm payrolls in January, a cool hundred grand more than economists had estimated, while the politically sensitive unemployment rate dropped an unexpected 0.2 percentage point, to 8.3%, the lowest in three years and down from over 9% just six months ago. Moreover, the details that can obscure or exaggerate the true nature of the jobs report were pretty much on the plus side as well. The preceding two months’ payroll tallies were revised up, and the jobless rate reflected an expanded labor force, rather than just dropouts. Finally, the so-called underemployment rate (U6 to fans of the data), which takes in folks who have quit looking for work or are working part-time but really want or need a full-time gig, edged down 0.1 percentage points last month, to 15.1%, and from around 16% for much of last year.
Perusing the payrolls data (which, of course, come from a survey of businesses, separate from the household survey from which the jobless rate is derived), our friends at the Liscio Report, Doug Henwood and Philippa Dunne, noted that payrolls posted their biggest rise since last April and their third-best monthly gain since 2006. Goods-producing industries had solid gains, with manufacturing up by 50,000, mining and logging up 10,000 and construction up 21,000, although the mild winter no doubt boosted the seasonally adjusted addition to the building trades. Meanwhile, finance shed 5,000 workers, information workers fell 13,000, and government was off another 14,000.
About the only bad news in the employment report was for Facebook. It can’t be a coincidence that its roster of users swelled to over 800 million worldwide during the worst economic downturn since the Great Depression, as joblessness swelled and with it, free time to spend on Facebook. And in the U.S., jobs are growing in manufacturing and construction, where few people sit in front of PCs, while shrinking in information, finance and government, where most everybody does.
So, as Facebook users go back to work, they will have less time to update their pages and peer at those of others. And fewer office jobs also means less time goofing off at work looking at Facebook (which is broken up by watching videos on You Tube.)”
Heh heh
>
Source:
More Jobs, Less Facebook
Barrons FEBRUARY 4, 2012
RANDALL W. FORSYTH
http://online.barrons.com/article/SB50001424052748703964504577193134223855306.html
Lots of conflicting news re Greece. To summarise:
Rumours that the acting PM (Papademos) was going to resign – denied. He has called for a meeting of all political parties for this weekend;
The Euro group meeting scheduled for Monday has been postponed – no new date set, though thought to be later in the week – suggests a deal re PSI and the 2nd bail out remains illusive;
The IIF representatives are heading back to Athens – positive sign, I guess;
All Greek political parties have rejected further cuts in private sector employment proposed by the Troika – they have suggested a 3 year pay freeze – rejected by the Troika;
The ECB refused to comment on suggestions that it should “sell back” its holdings in Greek bonds at the discounted price it bought them at, thereby reducing overall Greek debt further – the ECB have (previously) vigorously rejected the idea. The IMF are pushing for this and/or a similar solution, as Greek debt to GDP (even after the PSI) would otherwise remain above the 120% threshold (nearer 130%) they consider the maximum to be sustainable. The IMF can only participate in a further bail out if they deem that the country’s debt is “sustainable”;
The Dutch and the Germans expressed opposition to “official sector involvement” (“OSI”), proposed by the IMF and supported by some within the EU bureaucracy;
The German Finance Minister Mr Schaeuble made a number of cryptic remarks which suggest that Greece may have to EXIT the Euro Zone – Mrs Merkel contradicted him.
Basically, its all still up in the air. However, if I was a suspicious person, I get the feeling that there is an increasing number of people/countries in Europe who would quite welcome Greece’s exit from the Euro Zone – quite frankly, I don’t blame them. I, as I suspect most others, have no idea as to the outcome of the current negotiations, other than there is a view (which I do not share) that it may be marginally in everyones interest to reach “an agreement”, which, in effect, buys some more time before the inevitable Greek default. I remain of the view that Greece has proven to be a complete waste of time, money and effort and that it should be cut loose asap;
The ECB meets next week. Will they cut by 25bps? – possible, but (marginally) unlikely in my view. However, they certainly will have to, if Greek talks fail and indeed, they will have to do much more. I do however believe that the ECB will reduce their benchmark rates below 1.0%, which is another reason that I’m bearish on the Euro;
The important UK services index (services represents over 75% of the UK economy) rose unexpectedly to 56, from 54 in December, a 10 month high. Forecasts were for a decline to 53.3. The new orders component rose and business confidence improved by the largest amount since records began in 1996. The UK economy shrank by -0.2% QoQ in the last Q of 2011. This data is very good news. The BoE is to meet next week and advise on QE3 or not – personally, I think they will not wish to disappoint and will want any positive momentum to become embedded, though due to the volume of recent purchases, the amount may be limited to Sterling 50bn (Sterling 75bn if there is a problem re Greece);
The data reported yesterday in respect of January US NFP data was exceptionally strong. Payrolls rose by +243k, as opposed to a forecast of 140k and, in addition, private sector employment rose by +257k. November and December data was revised higher by +57k and 3k respectively. In addition, annual benchmark revisions disclosed that a further +266k jobs were created in 2011, than previously estimated. U6 saw a huge decline, from 16.4% to 15.1%. The employment to population ratio rose to 58.5% whilst the civilian force participation rate remained at 63.7%.The number of people unemployed declined to 12.8mn in January.
There were significant gains in manufacturing, but also in health care and in the service sector. The unemployment rate declined to 8.3%, from 8.5% previously. Total hours worked in the private sector rose by +0.2%, though by +1.2% in manufacturing – important as a 1/10th increase in average weekly hours equates to around 350k new jobs. Overall, the average work week was unchanged. Average hourly earnings rose by +0.2% MoM, or +1.9% YoY.
Milder weather clearly helped, as the number of people who could not work was only 206k.
However, these are very strong numbers;
Not only was the NFP data strong. The ISM non manufacturing index rose by +3.8 points to 56.8, the strongest reading in almost a year. The very important employment component soared to 57.4, the highest level in 6 years. New export orders rose by +5.5 points to 56.5 and overall, new orders increased by +4.8 points to 59.4. The inventory component declined by -1.5 points, suggesting that businesses were reducing inventories. This will negatively impact 1st Q’s GDP, but is positive thereafter, as businesses have to restock;
The superb US data (both NFP and ISM) resulted in European and US markets closing at their highs. There will be talk of US QE3 being unnecessary, but Bernanke’s testimony last week was pretty dovish (indeed more so than expected, I would argue) and I remain of the view that QE3 will happen, though may be delayed a bit.
If it were not for Greece, I would remain positive for the present, but those guys have an amazing ability to ruin a party. In addition, I am concerned that all the bears out there are U turning and now getting overly bullish – normally a very bearish sign, as they inevitably turn at the wrong time – and that the VIX is low (17 – near last May/July’s low) and getting lower, once again a bearish signal. As a result, I sold some (approx 25%) of my financials into Friday’s very strong market and will look to build up a few shorts – mining sector – maybe even EM’s shortly.
A$, Yen and Euro (against US$) looking like shorting opportunities as well.
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.
~~~
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.
>
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/
Today we find out just how seasonal those 200,000 new jobs were in December 2011. Consensus is for employment to grow by 140,000 — about par with population growth. Unemployment is expected to be unchanged at 8.5%.
As I am so fond of writing, no single month’s NFP matters all that much — focus on the overall trend to see what is significant. By way of the two charts below, the major overall trends have been improving. New Jobless claims have been ticking downwards since May of 2011. (Benchmark updates could be significant also).
We have seen a variety of retail sales disappointments — notably, Amazon.com (AMZN) and Ambercrombie & Fitch (ANF). Without more hiring and wage gains, higher consumer spending is going to be a difficult challenge to meet.
From a trading perspective, weakness would be problematic. With earnings slowing, the aforementioned soft retail, and the markets as overbought as they have been in a few months, the bulls don’t really need a weak number today.
From an investing standpoint, the outliers are where the risks lay: Too strong number (rather unexpected) might increase pressure on the Fed to end Operation twist and postpone QE3. A too weak number raises the possibility of a recession — currently thought of as not likely amongst most economists. A few observers — ECRI, Hussman, Rosenberg, Shilling, Faber, Rogers — think a recession is highly likely (For the record, I am still at 50-60% chance of recession, but willing to take that lower if the mixed data improves).
Hence, your reaction to today’s numbers should be a function of your positioning, holdings, timeline, and your risk management.
Employment situation report released at 8:30am
~~~
>
Initial Jobless Claims (2/2/12)
>
NFP (December 2011)
All charts courtesy of Barron’s Econoday
>
Tomorrow is (yet again) NFP day. While everyone is worrying about whether the December numbers were merely seasonal, we should also consider some of the longer term trends in Unemployment. These have major repercussions for Retail Sales and the ongoing Housing Weakness.
Fortunately, Pew Trusts gave us a full overview:
>
How Long Have the Unemployed Been Jobless?
~~~
Where are the Long-Term Unemployed?
Total and Long-Term Unemployment by Census Division, Quarter 4, 2011
~~~
More charts after the jump
"Overall household indebtedness is up from $7 trillion to almost $10 trillion since 2000. On this sum, we estimate, the American consumer has an annual interest bill of more than $500 billion; a sum, by the way, that vastly exceeds his current income growth." —Kurt Richebacher
"The Greek offer is not sufficient and they have to go away to come up with a revised plan," said a spokesman for the German Finance Ministry. The Greeks must first have a plan that satisfies the Germans which this comment states they clearly don't yet and then the Greek Parliament will vote on it this weekend. This said, whatever package gets voted on in Greece is basically an up or down vote on euro membership so we are entering another uncertain weekend for global markets. A failed vote will likely lead to a hard default which may be what...
read more »
Tweet
Facebook
Reddit
Digg this!
