February 6, 2011
IS THE JANUARY JOBS REPORT STRONGER THAN IT APPEARS?
The raison d'être of economic analysis and data collection is enhancing the clarity of the broad trend and drawing conclusions about the future. That's a tough assignment under the best of circumstances, although sometimes the game is unusually confusing, as it seems to be with Friday's update on January's employment numbers. At issue is the odd sight of the jobless rate dropping to 9.0% from 9.4% in December without a commensurate gain in jobs. Nonfarm payrolls rose by a scant 36,000 last month (or +50,000 if you ignore the shrinking ranks of government workers). That's down sharply from December's 121,000 gain. January's rise is the worst month for jobs since last September's loss of 29,000.
Huh? Falling unemployment of more than a trivial amount without a strong uptick in job creation? "It doesn’t take a great grasp of economics to figure out that when firms cut down on hiring the unemployment rate should increase," writes John Cassidy, the New Yorker's writer of all things economic. "But last month, the opposite happened. Or did it? Fortunately, I wasn’t alone in my befuddlement," he confesses.
The leading explanation for the substantial fall in the jobless rate without a strong rise in payrolls is the weather. A number of analysts blame Old Man Winter's unusual ferocity of late for the negligible progress in job growth. But that explanation isn't completely satisfying, in part because it's unclear how much of a factor the weather played in trimming employment gains. "It’s all a mystery," complains Robert Brusca, chief economist at FAO Economics.
Meantime, expectations are already bubbling about the implications for the next employment report. "If weather suppressed the payroll numbers, the jobs report in a month should be fairly strong," reasons The Wall Street Journal's Sudeep Reddy.
Then again, maybe there's a statistical diamond in the employment rough for January's numbers. "As confusing as the government report is, when I dig into it and combine it with other job reports, it is very clear to me the employment situation is improving, perhaps even dramatically so," asserts Robert Johnson, Morningstar's associate director of economic analysis.
Since Friday's report was released, a number of analysts say that the jobs picture last month is brighter than it appears on first glance, courtesy of the household survey data, the lesser known counterpart to the more widely cited establishment survey. Both series are published monthly by the government, although the establishment numbers typically receive most of the attention. Is one superior to the other? Each has pros and cons, the Labor Department notes in Friday's press release:
The household survey and establishment survey both produce sample-based estimates of employment and both have strengths and limitations. The establishment survey employment series has a smaller margin of error on the measurement of month-to-month change than the household survey because of its much larger sample size. An over-the-month employment change of about 100,000 is statistically significant in the establishment survey, while the threshold for a statistically significant change in the household survey is about 400,000. However, the household survey has a more expansive scope than the establishment survey because it includes the self-employed, unpaid family workers, agricultural workers, and private household workers, who are excluded by the establishment survey.
The household survey reports a 117,000 rise in employment for January—far more than the 36,000 gain in payrolls via the establishment survey (see Summary Table A, p. 8, here for household data). Rebecca Wilder opines that the household statistics "show the number of employed increasing by 117,000. The annual revisions dropped the employed by 472,000, so the unrevised number of employed increased by 589k in the release. This is a big gain." Why the differing signals in the two series? The weather factor, she argues, casts less of a distorting influence on the household survey.
Stephen Stanley, chief economist at Pierpont Securities, is also inclined to look to the household data as salvation for the weak January employment profile depicted in the establishment numbers. "The household survey has a history of leading payrolls in a recovery, so we’re setting ourselves up for a pretty strong improvement in payrolls," he tells Bloomberg. "The numbers that look weak on the surface now will turn more robust by the March-April-May period. There’s ample evidence that firms are getting more comfortable about adding workers."
Stanley's not alone in thinking positively. "The severe weather likely explains much, if not all, the weakness in payrolls," advises Ian Shepherdson of High Frequency Economics. "The BLS reports 886,000 people unable to work because of the weather in Jan, compared to the 417,000 average for the month. This is taken from the household survey and is unadjusted so you can’t just add it to the headline payroll number, but it clearly signals the snows affected the data. Expect a rebound in February."
The future, of course, is up for grabs as always. As for the numbers for last month, the household survey paints a brighter picture, but a 117,000 gain is still modest, at best. But even that number—indeed, any one monthly employment number—should be approached with a healthy degree of skepticism. As Dean Baker of the Center for Economic and Policy Research explains:
The household survey is always erratic. It effectively is measuring the level of total employment in the economy. Even if it is off by just 0.2 percent, this implies an error of almost 300,000. If it errors by this much on the high side one month and then by an equal amount on the low side the following month, it would imply a drop in employment of 600,000 in a context where there was no actual change in employment. Looking back over the last two decades it is easy to find months with large changes in employment that did not coincide with any obvious upturns or downturns in the economy.
As the chart below shows, recent history of net monthly employment changes for the two series over the past five years does in fact confirm that the household numbers (red line) are significantly more volatile than the establishment data (blue line).
Baker also reminds that in the last recession, consistent job growth didn't arrive until initial jobless claims fell below 400,000. Unfortunately, we're not there yet, as the latest reading on new filings for jobless benefits reveals.
All of which leaves us in a familiar but increasingly inadequate position of waiting for better news in next month's employment report.
Posted by jp at February 6, 2011 8:13 AM