Why The Jobs Report Is Worse Than It Seems
Economists, like Mark Zandi at Moody's and Jim Hatzius at Goldman Sachs, have consistently missed the reality of the economic situation. Just yesterday Hatzius was calling for 125.000 jobs and this morning predictions from all the talking heads on television were all above 100,000. Of course, the number was not only bad it was absolutely horrible. Yesterday's stock market dash on the back of the ADP Employment report, that we stated was merely just a rush of teenagers getting part time summer jobs, was completely dashed today as the ice water bath of reality washed across the markets.
Non-farm payroll employment increased by 18k in June, which as we said was significantly less than expected. However, last months 54k jobs, which was also well below expectations last month, was revised down to just 25k as was Aprils number by 15k.
Furthermore, the Establishment Survey also disappointed as average hourly earnings were unchanged month-over-month while the average workweek declined. The diffusion index representing the percent of industries reporting job gains fell to 53.4% from 54.1%
Tyler Durden at ZeroHedge brought out a point today that I have been banging the gong on for a while and this has to do with the "guesstimate" that the BLS uses called the "Birth/Death Adjustment". This number is supposed to represent the number of businesses that are opening and creating jobs versus closing and losing jobs. We know from just listening to the National Federation of Business surveys that small businesses are not creating the amount of jobs that the BLS is assumes.
"Whenever someone brings up the backing out of the birth death adjustment from the Non-Farm Payrolls number (which 99% of the time are additive), economists get all defensive and say you can't really use that number because it is akin to comparing apples to oranges, it is only applicable for the Non-Seasonally Adjusted NFP data (while the numbers that make the headlines are the seasonally adjusted ones) which of course means that the conversion from the NSA to SA number is a product of a multivariate equation with two unknowns (the B/D adjustment and the actual seasonal adjustment). Of course, this is just how the BLS likes it: after all this gives them plausible deniability to blame either X or Y or a combination thereof, but never disclose just what is the culprit for any specific discrepancy. So what does the BLS tell us to do when attempting to eliminate the B/D benefit? Simple: add or subtract the B/D adjustment from the Non-Seasonally Adjusted number. Yet when doing it on a quantized, monthly basis this is impossible due to the above-mentioned layering of the seasonal adjustment.
Well, there is a very simple workaround: just look at the Year over Year change in the Non-Seasonally adjusted numbers. After all that will eliminate all the intra-year seasonal adjustments, leaving just two clean numbers at the beginning and end of the full year sequence. This works like a charm when looking at June 2010 and June 2011 numbers, on both a Seasonal and Non-Seasonally Adjusted basis. The difference in the NSA series is 1,171K jobs, while the SA is 1,036K, almost a perfect match. And after all we have been hearing for so long how the administration has added 1 million jobs in the past year.
Luckily, now that we have a benchmark that does not need a seasonal adjustment, we can determine precisely what the Birth-Death contribution to the "jobs added" over the past year has been. The result: 606K, or 52% of the NSA jobs added (and 58% of the actual, seasonally adjusted jobs).
The chart below shows the monthly Birth/Death adjustments between June 2010 and June 2011."
My only question is going to be how long before someone starts to actually question the numbers that are little more than half guesses, fudges and hopeful wishing and starts to figure out the economy is in much worse shape than the general headlines, economists and talking heads on the media proclaim. More importantly, when are people going to stop listening to economists like Zandi, Hatzius and others, who are consistently wrong and never held accountable, and stop putting their hard earned savings at risk. It baffles me to no end.
Down To The Meat Of It
- The household survey was an unmitigated disaster as employment plunged by 445,000.
- Full-Time Employment cratered by 435,000 and is down in each of the past three months for a combined slide of 868,000
- The labor force contracted which caused the uptick to 9.2% unemployment. (Remember, TARP was supposed to keep the rate below 8%)
- The number of people that are unemployed jumped by 173,000 and now stands above 14 Million people in the unemployment line
The annual change in employment has been declining since the 1980's. As technology has increased productivity and manufacturing has now been outsourced to various other parts of the world the level of employment required to produce to meet final demand has slowly declined. While it may be early to tell it looks like the recent spate of hiring may have just reached its peak which coincides with our estimates that without further government stimulus, which is now a real probability, the economy will be in recession and we will see negative job growth by 2012.
One of the key charts that we like to look at to get a real guage on unemployment is the Employment To Population Ratio. This is the number of employed persons compared to the population as a whole. While we talk about creating 150k jobs here or 50k jobs there the population is growing at roughly 200k people a month. Therefore, we have to create a minimum of approximately 150k jobs a month just to stay even. This obviously has not been happening which is why currently we are at the lowest level of employment, relative to the total population, since 1984.
The bottom line here is that the Government has tried everything from TARP to TALF, TGLP to PPIP, POMO's to QE and after approximately injected $1 dollar for every dollar of GDP there has been negligable economic growth and even less employment growth.
The reason is the same. It is the same reason that we have been harping on for months now. With a consumer that is struggling to keep their head above water, wages declining as prices rise, and the ever present threat of job loss, consumers are focused more on paying off debt than consuming at the rate they have in the past. Therefore, there is not enough final demand to drive businesses to hire and with 7 applicatants for every job opening there is no pressure to increase wages.
It is a very bad mix for the economy and until someone in Washington wakes up to the fact that the policy measures that have been taken are failing we are doomed to repeat the cycle of insanity until the system breaks altogether.