Wow! 243,000 New Jobs Created in January

The headline number from the Unemployment Report this morning showed 243,000 jobs were created, more than the highest estimated increase by any of the economists surveyed before the report was released (the average expected increase from the economist survey was 120,000 jobs). The unemployment rate fell to 8.3%, again lower than predicted, and certainly good news for President Obama. Job growth was nearly across the board – in retail, construction, manufacturing, business services, and the hotel and restaurant industry. You can believe all this if you want, or you can go into the details in the report for some interesting context.

First, ever since the credit crisis of 2008, there has been a trend in the unemployment report that shows a declining participation rate in the job market. While a whopping number of jobs were created in January, a far larger number of people left the labor force - 1,752,000 in fact. The percent of the total working population who did not have jobs rose to 36.7%, an all time high. It’s no wonder the unemployment rate fell, when the denominator shrinks so markedly. The total number of people employed fell by 737,000. So what do you want to celebrate – the 243,000 who got jobs, or the million or so people who dropped by the wayside and are no longer counted in the data?

It makes you wonder how much faith you can put in the Labor Department reports. For example, the government, the business press, and Wall Street rarely report on the fundamental ways in which the US labor market is changing, with so many people dropping out of the work force. The press has had a hard enough time getting to grips with the Labor Department’s Birth/Death model, which over time adds to the number of people reported as employed. The model is supposed to compensate for the inability of the government to get good information on the number of new businesses created every month and which presumably add to employment. The problem is the model has been shown in the past to have significantly overestimated the number of jobs created by new businesses. Economists still don’t know if the model is appropriate, and how much of the 243,000 jobs created this month are the result of the Birth/Death model.

The other odd thing about the January report is that it does not coincide with most other evidence about the US labor market. There have been tens of thousands of high paying jobs lost in recent months on Wall Street. American Airlines just announced it is cutting 14,000 employees this year. Challenger, Gray and Christmas, an executive outplacement firm that does job surveys, reported that this January job layoffs increased by 28%. The Gallup survey on business employment indicated a rise in unemployment at the start of this year.

Maybe the 1,752,000 workers who this past month were relegated to government statistical oblivion don’t matter anymore to the economy. Wouldn’t it be nice to just keep focusing on the fewer and fewer people who have jobs, and the 250,000 or so in good months who join them? The problem here is that those 1,752,000 people who have gone to Labor Department purgatory no longer have the money to spend that they used to have. This annoying little fact keeps showing up in the lackluster revenue growth displayed by corporations reporting on 2011 Q4 earnings. The number of companies that have reported revenue growth lower than expected by analysts is higher than it has been in many years. The flip side of this is that the revenue and earnings “beats” on the upside are far fewer than expected. For all the S&P 500 companies, upside surprises generated 45 cents per share for the index average, but of this, a full 43 cents per share came entirely from the technology sector. And if you delve into the technology sector, what do you find? Revenue growth for the sector has been in excess of 15% last year, but strip away Apple, and the number falls to 5% growth.

The sad fact is that there are 1,752,000 fewer people this month who are going to be able to afford Apple products or any other fancy new technology toy. Not only are these people out of a job and facing cash flow shortfalls, prices are going up everywhere they look. The price splurge engineered by the Fed last year with QE2, in their intention to generate at least 2% inflation, hasn’t gone away. The ISM Services Sector report this morning, which showed surprising growth in services beyond what economists expected, also showed surprising strength in inflation. Companies reporting in the ISM survey noted price increases in “Airfares; Beef; Chemical Products; Chicken; Crab; Coffee; Diesel Fuel; Gasoline; Medical Supplies; Paper; Petroleum Based Products; Resin Based Products; Vehicles; and Wire.” The only commodity going down in price was corrugated boxes.

The problem facing the unemployed, the underemployed, the part-time workers, the millions of people who have fallen off the labor rolls altogether, and even those ex-bankers who had to take a job in January in poorly paying industries like retail, medical, leisure and hospitality (in other words all the sectors in which jobs were growing in January), is that the cost of living is going up relentlessly while their wages are stagnating at best. The US needs these people at full employment, because full time workers contribute to federal income tax revenue, which is increasingly in short supply. The Wall Street Journal reports that in 2011 there was a surprising decline in contributions to federal tax revenue from corporations. From 1987 to 2008, US corporations paid on average 25.6% of their US revenue in taxes; last year they paid only 12.1%, the lowest contribution since 1972. Haven’t you been reading about record corporate net income in 2011? These stories are true, so why aren’t corporations contributing more to the Treasury, and why is the burden falling increasingly on cash-strapped individuals?

Corporations are having such a bumper year in net income that you would think they would have no problem keeping their pension plan obligations up-to-date. Sadly, this is not happening. Among the S&P 500 companies, 97% had underfunded pension plans in 2011. The amount of the shortfall was nearly a quarter of a trillion dollars. Blame is being placed directly on the Federal Reserve and its zero interest rate policy, as pension plans, insurance companies, endowments and other charities have had a difficult time meeting interest income targets when interest rates are at zero. Somehow, this story has traveled below the public radar, and therefore only a few companies have felt obligated to top up their pension plan with contributions from their earnings.

The millions of people struggling for food and shelter and clothing have one bit of good news: they can buy a car! Banks are making car loans with abandon. They argue that it is far easier to repossess a car than to foreclose on a home, and the amount at risk on a car loan is of course much smaller than on a home loan or equity line of credit. The Market Watch news service reports that the banks are helping Detroit sell in excess of 11,000,000 cars this year by increasing their lending to sub-prime borrowers (those with low credit scores from 550-619). This segment of the population comprised 40% of all car loans last year. Even more interesting, loans to the segment known as “Deep Sub-Prime”, with scores less than 550 and a high risk of default, were up 17% last year.

How do the banks get around the fact that even these credit-challenged customers can’t afford the monthly payments on an average car loan? Easy. The banks are doubling the maturity on their car loans. Instead of granting four year loans, they are granting eight year loans to keep the monthly payment down. You don’t have to be an expert to know the rate of depreciation on a typical car is very quick, and by about two or three years the banks will be underwater on most of these loans.

But that is two or three years from now – an eternity in financial terms. Even if things really went bad for the banking industry with its car loans, all the evidence they have suggests that the federal government will be there to bail them out, no matter what President Obama says about “no more bank bailouts”. He was more than happy this morning to tout the 243,000 new jobs created and the economy that is on the mend. He certainly hasn’t complained about how Detroit and the bankers are up to their old tricks again. Ben Bernanke hasn’t said a word about deteriorating credit standards in the auto loan market; he’s too busy stripping wealth away from retired people and anyone else with savings. Here we are in 2012, and we have learned absolutely nothing from the debacles of the previous decade.

Well, maybe not entirely nothing. The government has got a lot better in focusing everyone’s attention on only one part of the story – the part where 243,000 people supposedly now have a job, while 1,752,000 who have given up are to be forgotten and made invisible. Except you’ll be able to see them – they will be those people down the street who have lost their home, and are now sleeping every night in their new car.

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Comments

knew all hell would break loose on this report

They incorporated the 2010 Census data. We'll be analyzing this all week but just on first pass it's hard to believe a labor participation rate of -0.3 percentage points when we see "Hispanic" population controls jump through the roof.

Certainly nice headline buzz. About to write up (on the left hand column) some number crunching overviews.

On layoff announcements, we have Microsoft announcing some huge layoff (while they claim they cannot find technical workers), a slew of pharmaceutical companies and then some of the other ones you mention.

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We're the press by the way

Every month we dig into labor participation rates, not in the labor force rates and go into excruciating detail on how the BLS calculates the rates and population. You can bet many in the press are going to report this month incorrectly.

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Your 1,752,000 people

Your 1,752,000 people includes those that went back to school and those that are no longer looking for work because they have decided to start a family or take care of loved ones. These people have always been part of the population. Don't try to scare people with statistics. Today's job numbers is good news. Last month the numbers weren't real because of the temp workers for the holidays, this month it's because of people going back to school. Next month you will blame the it on something else like tax preparation. Stop trying to put a damper on good news.

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good news, check back here

That's not correct. Those 1.75 million did not go back to school. What's happened is a major population adjustment by incorporating the 2010 Census data. December used the 2000 Census data and extrapolated monthly statistical adjustments via an algorithm, with yearly benchmark adjustments done by real world data. But the base of all of these estimates was the 2000 Census data. This month is 2010.

That said, we've already looked at the claim all of those young people are in school, or claim that all these people retired or magically returned to the 1950's and don't need to work. That is 100% false.

See this article, Employment will take a decade to recover, where a series of education enrollment rates are calculated and labor participation rates for those between 18-24 are calculated. Sorry, those young people did not all magically go to school.

We go into excruciating detail on these reports and we're working on them right now. Bear in mind we have mathematical and statistical backgrounds. I personally am not going to slam the BLS, unwarranted here, (this is not my article), so check back when we publish and hopefully explain this month employment report.

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make the last paragraph bold...

"Well, maybe not entirely nothing. The government has got a lot better in focusing everyone’s attention on only one part of the story – the part where 243,000 people supposedly now have a job, while 1,752,000 who have given up are to be forgotten and made invisible. Except you’ll be able to see them – they will be those people down the street who have lost their home, and are now sleeping every night in their new car."

Your write-up was excellent, thank you for your in-depth analysis of the current data and pointing out the full picture more clearly.

I enjoyed the read, but you could have just pointed me to the last paragraph and I would have gotten the most important stuff :)

Cheers.

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U6

How did the U6 number also go down? Is that in the adjustment? Seems to me if some 1.7 million went out of the workforce then U6 should have increased rather dramatically.

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U-6

U-6 is a ratio and now based on levels incorporating the 2012 Census, new population adjustments. Check back in a few hours, I will be publishing overviews on all of this.

This umemployment report has so many adjustments it's confusing. But don't worry, we amplify the unemployed and not counted, the underemployed and the ignored....I just make a point to have it been statistically valid, from the raw data, so hold on and bear with us and check back. I'll get U-6 up soon.

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ZeroHedge

Robert,

I cited an excerpt of your outstanding essay over at zerohedge.com, in the comments section, and I hope that you do not mind.

If you care to have your essay published on Zero Hedge, please forward it to tips@zerohedge.com.

I am apolitical, and consider myself independent politically, but I do believe the BLS methodology for calculating U3 is extraordinarily flawed, for many of the reasons you cite so succinctly.

Thank you for taking the time and effort to write such an outstanding essay that highlights the flaws in the BLS methodology for measuring employment and the number of jobs gained or lost monthly.

p.s. - There is an article on Zero Hedge which essentially highlights why Charles Biderman of TrimTabs agrees with much of what you wrote, and for many of the identical reasons, titled 'TrimTabs Explains Why Today's "Very, Very Suspicious" NFP Number Is Really Down 2.9 Million In Past 2 Months.'

Thanks again for your contribution to this critical issue.

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TruthinSunshine

Can you register here on EP and then link up to what you're talking about? I don't cross post, simply because EP keeps my more busy, I simply cannot keep up with everything. But I have delved into BLS data now for years and do have a mathematical/statistical background.

They do have real problems with modeling population adjustments. But I'm not sure which post you're referring to, this is the "Numerian" thread. I'll try to go check out TrimTabs report.

Seems one thing all have in common, we want better statistics, more drill down and larger surveys....so bottom line, keep the politicians out of the gov. statistical agencies (thank you Clinton, get your fingers out of that pie!) and give them more funding (and stop hiring H-1Bs, get some out of work Americans, Jesus!)

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Trimlabs adjustments

Ah, seasonal adjustments are another thing seemingly going a little nuts. We've seen the modeling "blow up" on housing data, and even the manufacturing ISM report. Some of this is blamed on the financial crisis. Basically they all use the same algorithm, X-12-ARIMA, which is an auto-regressive moving average algorithm.

Remember black swans and fat tails? Seems history now has the financial crisis in it's data points which is throwing the thing out of whack.

check this Trimlabs post out. This is really worth further exploration.

That said, check out these two graphs.

The first is the monthly difference between the seasonally adjusted payrolls data and the not seasonally adjusted one. As one would expect, we do see massive spikes in job growth as seasonal adjustments. The worst month is January and that's because people fire at the end of the year and don't hire like they do, esp. over the summer. Point of this is there is a clear cyclical pattern.

 

 

The next graph is annual of payrolls, seasonally adjusted for the year minus payrolls not seasonally adjusted.  The difference should be zero.  Notice how it's divergenging in 2009, 2010.  Now it's not by much the data is in thousands, but it shows, at least to me primilary that the financial crisis did throw off the X-12-ARIMA algorithm.  It should be zero theoretically for the year (or damn close). 

 

 

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just checkin' out ZeroHedge's last post on seasonal adjustments

He still (sorry) I don't think is getting it on the "not in the labor force" spike out, but on the seasonal adjustments to nonfarm payrolls, that's where the above two graphs do come into play. Just a "little bit" off on the seasonal adjustment, which now has the financial crisis, "great recession" data in it's algorithmic history here, but regardless, a "wee bit off" and bam, you've got over-inflated jobs numbers. The above is showing a "wee bit off" or an introduced bias and this is what I'm referring to with those wild ride outlinear historical numbers and rambling on about black swans and long tails. Auto-regression, moving averages will be skewed with enough "outlinear" data points.

But another point is 100k on payrolls is within the margin of error just on the survey alone, so why Wall Street goes nuts and think all is well over 243k jobs tells us they don't get proportion to save their souls! They are so used to crappy payrolls reports that when one pops up that's more in the normal range they think that's a miracle. Gez, a 400k payrolls change is a miracle, not one 200-300k range.

Anywho, I might go write up some stuff and enter the conspiracy universe of the birth/death model since so many seem to be debating BLS methods and numbers. Go digging around in some other statistics.

That said, I stand by the need for more "drill down" data at the BLS, more funding, much larger surveys and probably another one to mention is actual raw data collection. Some of this comes from the states (payrolls, birth/death) and they all must be using paper and pencil and dropping forms on the floor. That entire reporting process to me should be modernized, tightened up.

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ZeroHedge

Robert,

You are correct, I believe, in that ZH mistakenly concluded that there was a fallout of 1.2 million people from the labor force in January, but on the other hand, ZH has rightfully raised some other suspect data in this latest NFP Report (as have you), indicating that there's at least the prospect of an existing larger-than-average anomaly in the January figures (given the 2010 Census Bureau affect) than December-to-January prior ones.

I tend to believe revisions and future BLS U-3 monthly reports will confirm this January data as very flawed, but only time will tell.

I really think you should start writing for some larger websites, since I'm of the opinion that your analysis on statistical reporting, and economics in general is quite excellent, and you were one of the only sources I could find to succinctly, apolitically and thoroughly break down how to accurately interpret the latest NFP Report.

I just want to end by saying that I found the following amusing (or maybe annoying is more an appropriate adjective), back on the subject of January's NFP Report:

"There was not a big increase in discouraged workers," economist Betsey Stevenson commented on Twitter. "What happened was Census found a bunch of old people we had assumed died." [The Wall Street Journal, 2/3/12]

http://blogs.wsj.com/economics/2012/02/03/whats-behind-the-unemployment-...

Okay, so Betsey Stevenson (Betsey Stevenson, the chief economist at the Department of Labor, who works directly under the Secretary of Labor), is essentially saying a predominant majority of the people the 2010 Census 'discovered' were "old people [they] had [previously] assumed died."

You see, it's a "bunch of old people" that they discovered, who are presumably too old to be counted for purposes of measuring the unemployment rate, and therefore would not have affected the overall reported unemployment rate in any event....if her statement is to be taken at face value.

Or maybe I'm reading too much into this?

Thanks again.

TIS

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We're not going anywhere, EP is here to stay

This site is ours and this is where I write. The Economic Populist is a news source, so we're staying put. Being a news source has a slightly higher quality standard than a blog and because we are one, I take data extremely seriously to make sure what is written here is accurate.

On "old people were discovered" instead of dead, I'm wanting to get to some detailed analysis on Census data breakdown. I have to extrapolate this out of some databases and create some custom graphs, plus analyze it.

So, check back, maybe late this evening or tomorrow, that's in the works but it takes a lot time because I must get the raw data and number crunch.

On the seasonally adjusted issue, yeah, I think there is something there, it only takes 100k to be "off" and my main point is 243k payrolls just isn't an incredible miracle.

I honestly think the monthly BLS is too "statistically rough" to jump on monthly changes.

I read Zerohedge and sometimes he picks up on things that no one else sees, but I personally double check his data too. He caught a sudden increase, basically swaps to foreign banks, in the flow of funds report, which I do not think anyone else did...

This particular issue with the BLS has fooled major financial press, including the associated press thought.

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I heard somebody else talking about the old people

Apparently this statement must have been made at the press conference. There was also some reference to young teenage girls, or maybe it was unwed mothers, but the whole point being that these people whom they discovered existed from the new census wouldn't have made any difference to unemployment. They weren't in the labor force to begin with.

What we seem to have, then, is not so much 1.7 million people who've dropped out of the labor force all at once in January (or 1.2 million people if you use some other measure), but that number of people who existed all along and have to be added to the NILF totals all at once just because of a statistical revelation. I guess that's fine, but unless you put an asterisk on the chart, it still looks like a sharp drop in the labor participation pool occurred in January.

It reminds me of something which has always bugged me about the BLS, and that is the wording they use in their press release. This month was typical: the opening paragraph talks about how job creation in January was strong across the board, in business services, manufacturing, retail, hospitality, etc. Except it wasn't really. January lost 2 million + jobs, just like it always has in the past five or so years, as a result of the post-Christmas economic letdown.

The BLS could be more honest about the way it presents things. It could have said "hospitality (etc. etc.) fired fewer workers than would normally be expected," or "if we statistically compensated for the well-known post-Christmas economic letdown, employment picked up", or even "using seasonal adjustment factors, we estimate the economy created 243,000 jobs in January."

The fact that it does none of this but just blatantly mplies the economy is firing along creating all this employment is outright misleading. The press gobbles it up and the markets accept it as truth. The BLS could be accused of playing politics, but I suspect they are doing something different. I think they are playing the time-honored bureaucratic self preservation game. The BLS and the Labor Department know they have something valuable on their hands - the one piece of monthly economic data that everybody wants, that moves markets, and than can seal a president's fate at reelection time. They are hyping up the result because that sounds so much more important. The reality is more mundane, and why damage their franchise with reality? That would include letting people know that a small change in their assumptions about the labor pool could produce a radically different headline, political result, and market reaction.

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BLS NFP & TrimTabs

Thanks for that excellent & prompt response, Robert!

I have just registered on Economic Populist, but I see that you've already found the Zero Hedge article I referenced and that you've also already drilled down on the TrimTabs data that Charles Biderman compiled regarding January's BLS NFP report to identify even more curiosities.

I am trying to digest the TrimTabs data and what you extrapolated from it right now, but I do believe I have the basic gist.

You'd be a pure asset to the readership at Zero Hedge if you were to reproduce your essays and thoughts on this critical issue over there!

Thanks again,

TIS

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I should add look at the scale

The annual difference is in thousands, which is should be, but taking the difference in seasonally adjusted numbers from not seasonally adjusted ones, the cyclical pattern swings into the millions. I'm trying to say trimlabs is focusing in on something that is just a cyclical pattern, yet at the same time, also showing that the financial crisis added some error into the seasonal adjustment algorithm itself (it appears to me anyway).

Hey thanks. We link to Zerohedge and they to us, right hand column. I'm pretty dedicated to this site, so if people want to read things they have to enter a new URL. (how hard is that!) ;) but I've run over and commented in ZH before and if they find a goodie, I'll link it up.

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