Bill King, who we have interviewed on our radio show a few times in the past, ruffled more than a few feathers recently when he made the following statement in a recent King Report; “851k NFP jobs were created NSA; 811k were created NSA last February. The reality is 1.8 million jobs have been lost in 2012, NSA (not seasonally adjusted).”
The immediate question is how can that be when we have been creating jobs, according to the BLS data, over the last several months. In fact, according to the BLS, from the beginning of 2011 the economy has added 2,351,000 jobs. That is a tremendous number of jobs – no doubt about it. However, once the seasonal adjustments are stripped out and we look at the raw number of people that are employed we find a very different story. At the end of December 2010 there were 131,185,000 non-farm payroll employees. As of February 2012 there was 131,164,000 non-farm payroll employees. If we use some basic maths and subtract the first from the second we find that there was a DECLINE of 21,000 non-farm payroll employees.
Photo: Street Talk Live
A decline of -21,000 employees is far different that the 2,351k that the BLS reported. Welcome to the magic of seasonal adjustments. From the BLS website: “An economic time series may be affected by regular intrayearly (seasonal) movements which result from climatic conditions, model changeovers, vacation practices, and similar factors. Often such effects are large enough to mask the short-term, underlying movements of the series. If the effect of such intrayearly repetitive movements can be isolated and removed, the evaluation of a series may be made more perceptive.”
The chart shows the employment data back to 2000 where you can see the smoothing effect of the seasonal adjustments relative to the unadjusted data. As you can see the smoothing of the data allows for the trends of the underlying data to be more clearly seen. In regards to the data that Mr. King is discussing the seasonal adjustments that have been applied have added 2.3 million jobs in the last 14 months – even though the current employment count during that same timeframe is negative. These are some very large assumptions.
The dashed green line in the chart above shows the amount of jobs that will need to be added, non-seasonally adjusted employment (NSA), over the next 5 months in order for the data to stay within normal bounds. The economy will need to add roughly 600k jobs a month, every month, or just shy of 3 million jobs in total over the next 5 months. If this growth in NSA employment doesn’t occur then there will be negative revisions to the seasonally adjusted (SA) employment data in 2013.
Photo: Street Talk Live
Since the beginning of 2012, as reported by Mr. King, while the BLS reported an increase of 511,000 jobs on a seasonally adjusted basis – on a non-seasonally adjusted basis the economy actually shed 1.8 million jobs. The chart shows the data. In January of 2012, the BLS adjusted the employment data to show a gain of 284k jobs while the NSA employment data showed a decrease of 2,652k. However, in February, the adjustment by the BLS actually subtracted jobs showing a gain of only 227k when the unadjusted data actually showed an increase of 851k jobs. Once we net the two months of NSA data together we come up with a net decline of 1.8 million jobs so far in 2012.
What has to happen is that the underlying NSA employment, as shown above, has to play catch up to the SA model. The next few months will tell us a lot of the story so we will want to watch the NSA data closely.
Quantity vs Quality
There is one other point of consideration when thinking about employment data. One thing that the employment data does not adequately capture is the “quality” of employment. Despite views from the Supplemental Nutrition Assistance Program (ie Food Stamps) that providing individuals with welfare assistance is good for economic growth – the reality is that permanent, high paying, jobs are much better for the economy than temporary, low paying, jobs.
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If an individual used to be a highly compensated and skilled professional but is now working temporary to make ends meet – their ability to consume and support the economy is greatly diminished. In February, for example, about 160k of the 227k jobs were “low paying” work. This is why we continue to see wage growth stagnant even while hours works expands. If we dig deeper into the numbers we find that temporary hires have consistently made up larger portions of the non-farm payroll numbers. This all matters because the standard inflation models use the unemployment rate as a way to determine the amount of slack in the economy, and hence wage pressure. Finally, and most importantly, low paying jobs generate far less in tax revenue which is critical and a reason why, even with the supposed growth in the economy over the last few months, the nation’s deficit increased.
Furthermore, as we have discussed over the last couple of months, the abnormally mild winter likely skewed the employment data as there were considerably fewer reports of people not reporting to work as a result of the weather this winter. The average from December through February this year was 170,000 workers compared to the historical average of 290,000 and clearly well below the last two years. Once we begin to measure employment data in more normal seasonal weather we may likely see negative revisions to the data. I realise that this is all very confusing.
Photo: Street Talk Live
Employment And Population
Are we creating new jobs? The answer is probably yes. Unfortunately, most of them, as discussed, are much lower paying jobs which likely explains the declines in payroll taxes. The real issue is that while we focus on the weekly jobless claims and the monthly employment data from week to week and month to month we are missing the much bigger picture. The population in the country also continues to grow. This is why the employment level relative to the population in the U.S.. has continued to be mired at levels not seen since the early 80’s. The difference is that in the 80’s the employment to population was increasing – not declining as it is today.
The issue of demographics, as baby boomers move from work life to retired life, has mounting ramifications from the economy to the financial markets. This is the real story that is unfolding. The question that we need to be asking is how many of these individuals will actually EVER retire? If we look at the household savings and income data we find that on average the bulk of individuals in the U.S. today make a average income of approximately $50k and have only slightly more saved up for retirement. With only a single year’s worth of income needs in savings the demand for continuation of employment long into retirement years will put additional downward pressure on wages as the available labour pool continues to dwarf the supply of available work. The ramifications are far more important than most analysis gives credence to. (I suggest you read Boomer Demographics by Doug Short as a primer)
So, while a case can definitely be made for the seasonal adjustments to the employment data to smooth the wide swings into a more perceptible trend, the “great recession” of 2008, and the subsequent balance sheet deleveraging of the American society, may well have changed the way that we need to view the data. The models that have been developed and applied to the underlying data have never had to account for such a ravaging of the domestic economy. In the years to come we may well find that many of the economic theories that were developed after the “Great Depression” need to be revisited to account for the impact of the financial crisis to the magnitude experienced, not only domestically, but globally.
For now, however, as investors it will continue to be beneficial to look past the headline numbers, as they are bantered about by the mainstream media, and continue to view the trends of the data for what they may really be trying to tell us.