I’ve seen a lot of employment numbers over the years, but I really can’t recall anything like the controversy that this one generated after its release on Friday morning. It seemed straightforward enough: The consensus of surveyed economists was expecting the addition of 140,000 jobs; we got 257,000. They were looking for an unemployment rate unchanged at 8.5%; it dropped to 8.3%.
Pretty straightforward, right? In days past, it would have been. Great number, 117,000 more than expected (a rare event), unemployment drops by two-tenths of a percent (also rare). But this time out was different, and the root of the controversy was the annual revision that the BLS (Bureau of Labor Statistics) makes to its numbers. The adjustment created a grey area for interpretation, and led to intense rock-throwing on both sides of the recovery vs recession debate.
The bulls had the wind at their backs, and the market seemed to agree. Most economists, even the bear-leaning David Rosenberg, said the numbers looked very good. Number cruncher extraordinaire Ian Shepardson at High Frequency Economics called the number a “game changer,” though he did add that seasonal adjustments made a final verdict difficult. But the markets cast their votes, with stocks solidly up and bonds even more solidly down, ending the day with both feet in the bull camp.
But throughout the day and on into the weekend the bears made their case. First came CNBC’s Rick Santelli. He acknowledged the encouraging number of jobs added but raised the issue of the drop in the participation rate as we discussed at M&C here, calling it shrinkage. Zero Hedge, a bear, put up a series of posts poking holes at the release’s apparent bullishness, and stuck to their guns over the weekend. The economic research boutique TrimTabs estimates employment based on government withholding tax information, and says their data showed the addition of only 83,000 jobs.
Then the mud really started flying, with Big Picture blogger Barry Ritholtz weighing in against the bears:
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).
Zero Hedge counterpunched with a lengthy post of their own yesterday, sniping at the foundation of Big Picture’s argument:
Finally, as to some newsletter and namesdropping blogs allegation that the Labor Force did not, in fact, increase by 1.2 million in January, we have one simple question: just how does one “refute” a statement with an assumption? Because last we checked, the BLS did not provide a smoothing breakdown of how it applied its seasonal adjustment for the “population control effects” which saw the population increase by 1.7 million in January and those not in the labor force rose by 1.2 million.
A lot of the confusion comes from the methods employed by the BLS. This isn’t all that surprising given the nature of the task, that is, trying to follow the number of jobs while monitoring the multiple changes that happen in the population over time. If someone retires, for example, that person exits the workforce, and his job disappears. Similarly, when a teenager enters the workforce and begins looking for a job, he is “unemployed,” and the workforce increases by one person.
To sort all this out, the BLS uses two separate surveys to calculate the various figures related to employment, the “establishment payroll survey” and the “household survey.” The establishment payroll survey is based on a survey of about 140,000 US enterprises, and collects data related to the number of employees at these firms, and how that number has changed. The household survey, also known as the current population survey, focuses more on demographic issues such as size of the labor force, hours worked, earnings, etc. To complicate the picture still further, the BLS also incorporates information from the official census, conducted only once every ten years.
Getting the two surveys to line up would have to be a challenge, and it is. There was even an academic research paper on the subject, published in March 2009, titled “Exploring Differences in Employment between Household and Establishment Data,” which found a large mismatch in the two surveys’ numbers. Looking at data from 1996 to 2003, the researchers found that 6.4% of the employees from the establishment payroll survey were not accounted for as such in the household survey. If that is our margin of error, we’re left to hold a finger to the wind.
Even the actual BLS news release for January’s employment data a challenge to sort through, at 42 pages. I’m reviewing it now and will offer up an opinion shortly, though I’d never claim to serve up the last word on the subject. Ultimately the market will decide. We saw its first reaction, but the market has a way of changing its mind, so it may take a day or two to see where it comes out on the issue. So far the onus is on the bears to prove themselves on this one, because the market gave the good headline news a strong endorsement on Friday.