Grossly Distorted Statistics

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Digging under the surface, the drop in the unemployment rate over the past two years is nothing but a statistical mirage. Things are much worse than the reported numbers indicate
 
 

Nonfarm Payroll +227,000 ; Unemployment Rate Steady 8.3%; BLS vs. Gallup

Posted: 09 Mar 2012 08:25 AM PST

Quick Notes About the Unemployment Rate

In the last year, the civilian population rose by 3,584,000. Yet the labor force only rose by 1,569,000. Those not in the labor force rose by 2,014,000.
In February, the Civilian Labor Force rose by 476,000.
In February, those "Not in Labor Force" decreased by 310,000. If you are not in the labor force, you are not counted as unemployed.
Participation Rate rose .2 to 63.9%
Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

Over the past several years people have dropped out of the labor force at an astounding, almost unbelievable rate, holding the unemployment rate artificially low. Some of this was due to major revisions last month on account of the 2010 census finally factored in. However, most of it is simply economic weakness.

Jobs Report at a Glance

Here is an overview of today's release.

US Payrolls +227,000 - Establishment Survey
US Unemployment Rate steady at 8.3% - Household Survey
Average workweek for all employees on private nonfarm payrolls was unchanged to 34.5 hours
The average workweek for production and nonsupervisory employees on private nonfarm payrolls edged higher 0.1 hour to 33.8 hours.
Average hourly earnings for all employees in the private sector rose by 3 cents to $23.31

Recall that the unemployment rate varies in accordance with the Household Survey not the reported headline jobs number, and not in accordance with the weekly claims data.

February 2012 Jobs Report

Please consider the Bureau of Labor Statistics (BLS) February 2012 Employment Report.

Nonfarm payroll employment rose by 227,000 in February, and the unemployment rate was unchanged at 8.3 percent, the U.S. Bureau of Labor Statistics reported today. Employment rose in professional and businesses services, health care and social assistance, leisure and hospitality, manufacturing, and mining.

Unemployment Rate - Seasonally Adjusted

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Nonfarm Employment - Payroll Survey - Annual Look - Seasonally Adjusted

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Actual employment is about where it was in 2001.

Nonfarm Employment - Payroll Survey - Monthly Look - Seasonally Adjusted

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Between January 2008 and February 2010, the U.S. economy lost 8.8 million jobs.

Over the last two years, nonfarm payrolls have added 3.5 million jobs. Of the 8.8 million net jobs lost between January 2008 and February 2010, 40 percent have been recovered.

Statistically, 127,000 jobs a month is enough to keep the unemployment rate flat. The average employment gain over the last two years has been 145,000, barely enough (statistically speaking) to make a dent in the unemployment rate.

Yet, the civilian unemployment rate has dropped from 9.8% to 8.3%.

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Average Weekly Hours

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Index of Aggregate Weekly Hours

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Average Hourly Earnings vs. CPI

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"Success" of QE2 and Operation Twist

Over the prior 12 months, average hourly earnings have increased by 1.9 percent. In January, the Consumer Price Index for All Urban Consumers (CPI-U) had an over-the-year increase of 2.9 percent; growth in prices has recently been outpacing growth in earnings.
Not only are wages rising slower than the CPI, there is also a concern as to how those wage gains are distributed.

BLS Birth-Death Model Black Box

The BLS Birth/Death Model is an estimation by the BLS as to how many jobs the economy created that were not picked up in the payroll survey.

The Birth-Death numbers are not seasonally adjusted while the reported headline number is. In the black box the BLS combines the two coming out with a total.

The Birth Death number influences the overall totals, but the math is not as simple as it appears. Moreover, the effect is nowhere near as big as it might logically appear at first glance.

Do not add or subtract the Birth-Death numbers from the reported headline totals. It does not work that way.

Birth/Death assumptions are supposedly made according to estimates of where the BLS thinks we are in the economic cycle. Theory is one thing. Practice is clearly another as noted by numerous recent revisions.

Birth Death Model Adjustments For 2011

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Birth Death Model Adjustments For 2012

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Birth-Death Note

Once again: Do NOT subtract the Birth-Death number from the reported headline number. That approach is statistically invalid.

Household Survey Data

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In the last year, the civilian population rose by 3,584,000. Yet the labor force only rose by 1,569,000. Those not in the labor force rose by 2,014,000.

That is an amazing "achievement" to say the least, and as noted above most of this is due to economic weakness not census changes.

Decline in Labor Force Factors

Discouraged workers stop looking for jobs
People retire because they cannot find jobs
People go back to school hoping it will improve their chances of getting a job
People stay in school longer because they cannot find a job

Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

Part Time Status

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Part-time status shows little improvement vs. a year ago.

Table A-15

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Table A-15 is where one can find a better approximation of what the unemployment rate really is.

Notice I said "better" approximation not to be confused with "good" approximation.

The official unemployment rate is 8.3%. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

U-6 is much higher at 14.9%. Both numbers would be way higher still, were it not for millions dropping out of the labor force over the past few years.

Grossly Distorted Statistics

Given the complete distortions of reality with respect to not counting people who allegedly dropped out of the work force, it is easy to misrepresent the headline numbers.

Digging under the surface, the drop in the unemployment rate over the past two years is nothing but a statistical mirage. Things are much worse than the reported numbers indicate.

BLS vs. Gallup

Gallup has the unemployment rate at 9.1% not 8.3% and the "underemployment" number at 19.1%, not 14.9%.

Bear in mind the Gallup numbers are not seasonally adjusted but the BLS numbers reported above are. Nonetheless, it's entirely safe to say that 19.1% is far closer to the truth than 14.9%.

Please see Gallup Reports Large Jump in Unemployment to 9.1%, Underemployment to 19.1% for details.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
 
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