Putting Employment Numbers Into Perspective

Editor's note: This article was originally published on February 4.

Everyone knows by now that the US is facing difficult choices. Depending on what assumptions you use, the unfunded liabilities of Social Security and Medicare are between $50 trillion and $80 trillion and rising. It really doesn't matter, as there is no way that much money can be found, given the current system, even under the best of assumptions. Things not only must change, they will change. Either we will make the difficult choices or those changes will be forced by the market. And the longer we put off the difficult choices, the more painful the consequences.

This week we begin a series on the choices facing the US, having covered Europe in the first three letters of the year. In order to make the best of a difficult situation, we need to understand the consequences of the choices we make. "Cut spending," say some. "Tax the rich," say others. "Cut out waste and corruption" is always a popular choice. "Do all of the above," intone others.

There are over 3,000 different tax programs that allow for deductions, as Congress has passed out income tax benefits to almost everyone over the past 100 years. In fact, if we cut out all "tax expenditures" (the deductions we get), the budget would be very close to balanced! But there is some group that sees each one of those tax deductions as vital to the future of the republic. Some are quite big, like charity and mortgage-interest deductions, or agricultural subsidies. Others are small and focused on keeping specific industries competitive and even viable. Your municipal bond interest-rate deduction keeps local funding and borrowing costs low. Local government interest rates would rise dramatically if that was repealed. Some, like the earned income tax credit, are seen as a way to help out those with less income. All have their beneficiaries.

Who Took My Easy Button?
There is a television commercial in the US that offers an "easy button." Simply push it and the product you want will appear.

With regard to the problems facing the country in the next few years, there is no "easy button." There are no easy choices. And the choices we eventually make will have both short-term and long-term consequences. Cutting spending will reduce GDP and tax revenues in the short term, as we see in Europe as countries struggle with "austerity." Raising taxes will also slow the economy for a time and reduce potential private employment over the longer term. If the choices were easy or obvious, even politicians in our admittedly dysfunctional political system could make them.

If the US does not make a choice as to how to get its deficit under control in 2013, the political realities are that it will not happen until 2015, at best, and more likely 2017. By then we will be in a situation that looks like today's Italy at best (if it's 2015) and Greece at worst (if we wait till 2017). Greece is a disaster we all know about. Italy faces a very difficult set of choices that will mean recessions and slow growth, or eventual default. Or Germany has to allow the European Central Bank to target Italian (and then, perforce, Spanish) bond rates to make it possible for Italy to pay back its debts while only suffering a recession, which will not be good for the value of the euro or the inflation level. (And this assumes that Greece and Portugal exit the euro, by the way.)

The US does not want to find itself in a situation where we are faced with the choice between a depression or the Federal Reserve monetizing the deficits and debt as we try to find a new balance. Both are disastrous, just in different ways. And not only for the US but for the world. Not dealing with the problem in the near future (in 2013) will necessitate far more draconian cuts in services that we see as essential (health care, military, education, and pensions) and far higher taxes than anything we can even contemplate today.

Are things really so dire? I would submit they are. It is simply economic reality. A country cannot run deficits that are 8% to 10% of GDP forever (and that is the path we are on, under rosy economic assumptions that assume no recessions in the next 10 years). In the US, we will soon cross over 100% of federal debt-to-GDP. At some point simply servicing the debt (paying the interest) will eat deep into the budget and decimate what we now think of as critical services and programs that we think of as fundamental rights. When a crisis comes, nothing is off the table. All the sacred cows of today? Some will get led to the altar and sacrificed for the greater good of the others.

In one sense the US is lucky. The basic choice we face can be stated simply: How much health care do we want and how do we want to pay for it? If we want the health care program in place today, then we either have to raise taxes or cut other programs. Or we have to seriously reform the US medical system and how much we pay for it. Or maybe all of the above. But raising taxes as much as we'd need to would seriously impact employment, both potential and real.

So, as we start on this series, I am going to try to put a human face on the consequences of our choices. Because, in the end, what we are really talking about is jobs and health care. And every solution will have consequences that impact both. So, with that as a preface, let's jump in by starting with the employment numbers that came out today.

Putting a Good Employment Number in Perspective
The non-farm employment report that came out this morning was good. 243,000 jobs, and they were not just in the health care and food and beverage categories, but across the board. Unemployment dropped to 8.3%.

There were some early comments that the unemployment number was lower because another 1.1 million people dropped out of the work force, no longer looking for work. If you read just the simple number, you might think that. But there were asterisks all over this report, telling us we had to look deeper. A lot deeper.

First, this was the normal month for annual revisions, when the Bureau of Labor Statistics (or BLS) makes adjustments to the prior year's data, based on new information. And there were some extensive revisions. So the number in the work force did not actually drop. Those who thought so:
"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)." (Source: The Big Picture)

Spread out over 10 years, 1 million people is not all that much on a per-month basis. If you just looked at the numbers in the actual release, it would also lead you to believe that somehow last month around 1.2 million working white men and women just disappeared, or that the number of working Hispanics rose by 800,000. There are a lot more of those types of anomalies. But they are also explained by the fact that the BLS incorporated the recent 2010 census data into their formulas. Apparently, the Census Bureau found a lot more Hispanics and Asians in the country than they did in 2000, and that forced the BLS to make adjustments in their estimates, as they did with their numbers of people in the work force.

All these numbers need to be taken with a large dose of salt, as they are subject to large revisions. This past year the BLS adjusted the employment numbers on a monthly basis, mostly upward, as more jobs were created than they estimated, which is normal for a recovery. In the last recession, they had to go back and adjust the prior numbers downward. It is simply the result of using models and making estimates. The BLS is very straightforward about how they make their models. You can re-create them if you want to. If you go through that process, you get a better understanding of the extent to which the monthly employment number is just an estimate.

For instance, last month, rather notoriously, the BLS found 42,000 new delivery jobs. No real surprise, as Fedex and UPS and other delivery companies hire more workers for the holiday season, and as more and more of us shop online. But those are temporary jobs, and the BLS likes to use seasonal adjustments to smooth out such anomalies. A friend of mine talked with them today, and they said that they recognized the problem and had made adjustments to their models to take into account the new seasonality of holiday hiring. Next December there will be no surprise of 40,000 temporary jobs showing up in the data. And did they back them out in this release? Yes, but in the revised December data.

If you subtracted 42,000 jobs from last month's number the non-farm payroll number would have been close to a loss. What would that have done to the stock market? But if they used the current, revised data, it would have shown 207,000 new jobs, which is a good number and much stronger than the first estimate. In fact, the last three months have averaged 200,000 new jobs a month, when we look at the revisions.

And that is the point. These are the best estimates the BLS can come up with. They are very clear about how they go about making the estimates. If you have a better way, then by all means propose it. (In fact, there are a lot of people who do just that. Clearly, they have more time on their hands than I do!)

But anyone who trades on this number is gambling. It can be revised up or down, even years later. I find the preoccupation of the market with that number amusing.

But what is not amusing is the reality that is masked by the joyful response of the stock market to the good news. This was a good employment number, not a great one. It takes about 125,000 new jobs just to keep up with population growth each month. That means we created roughly 120,000 jobs that helped bring down the unemployment number. The US economy has created almost 3 million jobs in the last two years. That means we only need another 7 million to get back to where we were in 2007! Look at the graph of the total numbers of jobs in the country, as of last month. (From the St. Louis Fed FRED database)



So even if we reclassify 1 million workers as Hispanic, Asian, or Black, we are still down 7 million jobs. As I detailed about a year ago, even if we create 250,000 new jobs a month, it will take almost five years to get back to where we were in 2007. That is IF we can avoid a recession in the meantime. Such a growth rate would require whole new industries and new types of work, much like computers and technology in the '80s and '90s. (I think that could happen, but that is a story for another book.)

Is it any wonder that the Conference Board Consumer Sentiment number that came out on Monday dropped precipitously, falling to 61.1 from 64.8 (revised up from 64.5)? The present-situation component led the decline, falling from 46.5 (previously 46.7) to 38.4. The expectations component dropped slightly, from 77 (previously 76.4) to 76.2. "The decline went against expectations of increasing confidence and is a sign of consumers' uncertain views of the economic recovery." This in spite of the fact that today's employment number was so much better than consensus expectations. Things may be getting statistically better, but we don't feel all that content.

And while we should enjoy the better employment numbers, we need to take a peek at another, less sanguine, number in the BLS report, and that is wages and income. Let's look at this chart from my favorite slicer and dicer of data, Greg Weldon, who makes his return to Thoughts from the Frontline after being absent for too long. A chart from the maestro of statistics will help bring the problem into focus. First, look at how real (after-inflation) disposable personal income has gone flat since 2000, after rising in line with inflation for a very long time. (Go here for subscription information.)



The above suggests there has been little growth in disposable income for five years. But it is worse than that. This next chart, from Rich Yamarone of Bloomberg, who was on a panel with me Wednesday night, shows that government transfer payments have been an increasing share of disposable income since the beginning of 2008. Without that government spending, consumer spending would be much worse than it is. But then so is the federal deficit. There is no free lunch.



It gets worse. Madeline Schnapps of TrimTabs shot me a note about her frustration with the employment numbers. TrimTabs tracks federal withholding taxes to give them an advance estimate of the employment number. In the past, the more taxes that were withheld, the more jobs there were. For the past few months, their data has shown fewer jobs than the BLS estimates. I called her late tonight, and she answered (I know, neither of us has a life outside of numbers). She was still mystified. The last time their data was this different from the BLS numbers was in the last recession, when the BLS estimated too many jobs and later went back to revise their numbers, which were then more in line with TrimTabs tax data.

I suggested that the problem may be that even though more people are working, they are making less money and thus paying less in taxes. But that thought is not apparent in the data. Average hourly wages are not down all that much. But self-employment income is not included in that figure. And many people have been forced into "self-employment," which can mean part-time contract work or consulting, and the drop in income is being missed by the data.