This from my recently published January ‘Moving Markets’ newsletter, click the link on this page for a complimentary subscription.
After many prognosticators declared the recession was over recently, the January employment report, just released as this month’s issue went to final edit was in a word – disappointing.
This from Bloomberg on January 8, 2010:
The U.S. unexpectedly lost 85,000 jobs in December, supporting Federal Reserve forecasts that a labor market recovery will take time and making it more likely interest rates will stay near zero for the next six months.
Payrolls fell last month after a revision showed a gain of 4,000 in November, the first in almost two years. The median estimate of economists surveyed by Bloomberg News projected no change in December. The jobless rate held at 10 percent.
Treasury yields and the dollar slid as traders increased bets the Fed will keep interest rates near a record low for “an extended period.” While job cuts have slowed, companies are holding back on hiring as they gauge the strength of the economic recovery and contend with tight credit.
This also from the same Bloomberg article:
The survey of households, used to calculate the unemployment rate, showed employment dropped by 589,000 workers last month. A decrease of 661,000 in the number of people saying they were in the labor force prevented the jobless rate from rising. The participation rate, or the share of the population in the labor force, fell to 64.6 percent, a 24-year low.
In past issues of “Moving Markets” we’ve discussed the fact the methodology used to calculate the unemployment rate has changed from the way unemployment was reported prior to the Clinton administration.
The ‘real’ unemployment rate many would argue is much higher.
An article recently published in “The Business Insider” addresses the employment rate versus the unemployment rate. It’s interesting.
According to the article, published on January 8, 2010, the employment rate is 58.2%. That means for every 100 people in the United States, 41.8 are not working.
To put that number in perspective, the following chart illustrates that the employment rate is now at the lowest level since 1983. Look at the chart below:
However, the 85,000 jobs lost number, quoted in the report, may not be accurate according to some sources.
Economist John Williams recently reported the actual job loss in December was closer to 500,000. In his December employment report commentary (released January 8, 2010) he noted the 85,000 reported number of job losses is probably off for a number of reasons:
1.) The birth death model used to help factor unemployment is flawed. According to Williams, 250,000 jobs lost in December were not reported due to this model.
2.) The seasonal bias adjustment to the unemployment rate missed another 135,000 lost jobs.
3.) Another 100,000 or so jobs were lost but not reported due to seasonal factor problems resulting from a longer term downtrend in employment.
Let me attempt to explain in more detail what Williams is asserting.
The birth death model refers to the birth of new businesses and the death of existing businesses, i.e. businesses going out of business. According to the Bureau of Labor Statistics’ website (www.bls.gov) (highlighting mine):
The CES sample includes about 150,000 businesses and government agencies drawn from a sampling frame of Unemployment Insurance tax accounts which cover approximately 390,000 individual worksites. The active CES sample includes approximately one-third of all nonfarm payroll workers. The sample-based estimates are adjusted each month by a statistical model designed to reduce a primary source of non-sampling error which is the inability of the sample to capture, on a timely basis, employment growth generated by new business formations.
There is an unavoidable lag between an establishment opening for business and its appearing on the sample frame and being available for sampling. Because new firm births generate a portion of employment growth each month, non-sampling methods must be used to estimate this growth.
Two important points to note:
One, government agencies are included in the sampling when calculating the unemployment rate.
Two, non-sampling methods are used each month to estimate employment growth occurring as a result of new business start ups. This means instead of actually measuring employment growth as a result of new businesses, the Bureau of Labor Statistics estimates this growth.
This also from the Bureau of Labor Statistics’ website:
Earlier research indicated that while both the business birth and death portions of total employment are generally significant, the net contribution is relatively small and stable.
In other words, the BLS assumes for employment calculation purposes new business births and existing business deaths essentially “wash” and thus have relatively little net effect on overall employment. That might be a bad assumption in today’s economy.
To be continued on January 21, 2010……
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