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Did Unemployment Really Go Down?

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The employment report from the Bureau of Labor Statistics was negative and supports the idea that manufacturing isn't leading the economy -- at least not yet.

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Editor's Note: This article was originally published at The Daily Capitalist.

Friday's employment report from the Bureau of Labor Statistics (BLS) was quite surprising until I took a closer look at it. While I would like to report that the drop in unemployment rate to 9% from 9.4% was a real phenomenon, it was more of a statistical aberration. In fact the data are not indicative of anything.

The report itself said that there were a net 36,000 job gains overall for January (versus 121,000 in December) , and a gain of 50,000 jobs in the private sector, down from 121,000 jobs created in December.

For the latest month, private service-providing jobs rose 32,000 after a 146,000 increase in December. A standout subcomponent is retail trade which posted a 28,000 increase despite bad weather. Goods-producing jobs rebounded 18,000, following a 7,000 decrease in December. Manufacturing is showing a boost in momentum as jobs jumped 49,000 after a 14,000 gain the month before. Construction likely was damped by adverse weather, falling 32,000 in January, following a 17,000 decline the prior month. Mining edged up 1,000 in January. Government jobs fell 14,000, following an 18,000 drop in December.

Wage gains improved in the latest month. Average hourly earnings in January rose 0.4 percent, following a 0.1 percent uptick the prior month. The January figure topped the market median estimate for a 0.2 percent increase. Most likely, the rise in earnings was due to the jump in manufacturing employment-in a high wage sector. The average workweek for all workers posted at 34.2 hours, compared to analysts' forecast for 34.3 hours.

On a year-ago basis, overall payroll job growth rose to up 0.8 percent in January from up 0.7 percent in December.


Some 43.8% of unemployed Americans, or 6.2 million people, were out of work for more than six months in January. The broadest measure of unemployment, the so-called "U-6″ measure was still very high no matter how you measure it, at 16.1%.


Click to enlarge


If there were only 36,000 jobs created (weak) then why did the unemployment rate drop? If other indicators showed unemployment up, why did the Bureau of Labor Statistics data show unemployment went down?

For example, Gallup said Thursday that their survey revealed that the unemployment rate went up to 9.8% from 9.6%. Both ADP and Challenger reports were more negative than for the prior period.

A significant reason for the decrease in the unemployment rate was an annual population adjustment the BLS makes in December 2010. Based on current census data they estimate the amount of the workforce as a percentage of the population. In this case the workforce population was deemed to have dropped by 504,000 workers. Here is how Bill McBride at Calculated Risk explains it:

The unemployment rate declined to 9.0% in January from 9.4% in December. The unemployment rate comes from directly from the [household survey], but we can also think of it in terms of change in the labor force, and changes in the number of unemployed people. The unemployment rate is a ratio, with the numerator the number of unemployed, and the denominator the Civilian Labor Force -- so the following changes lowered the unemployment rate to 9.0%.

The [household survey] also showed a decline in the Civilian Labor Force Level by 504,000. Some of this decline was due to a lower participation rate, and some of this decline was due a lower estimate of the Civilian noninstitutional population. In reality the working age population probably increased in January, but the updated population estimate showed a decrease of 185,000 people in the month.

Without the change in population control, the [household survey] would have shown an increase of 589,000 employed people. Also, without the change in population control, the number of unemployed would have fallen 590,000 (U-3). With the update population estimate, the number of unemployed declined 622,000.

So without the change in the population control -- the change can be confusing -- the [household survey] showed a surge in employment and a sharp decline in the unemployed, and that is the reason the unemployment rate declined sharply.


It means that the statistical adjustment was probably inaccurate, i.e., the decline in workforce was due more to dropouts than from a decrease in population. For more on this see this excellent piece by Mike (Mish) Shedlock, who really dislikes the BLS models, especially the business birth/death model, here.

Jon Hilsenrath, the Wall Street Journal's pipeline into the Fed, quotes BLS economist, Jim Borbley:

Americans are not flooding back into the labor force as they used to do after a recession ends. The labor force participation rate dropped to 64.2% in January, its lowest point since 1984. Demographic trends like early retirements and women leaving work are likely part of the story. In the long-run, a lower labor force participation rate is not good news because it will hold back economic growth (fewer people producing stuff) and it means the working population has a large portion of non-workers to support. Moreover, if people are dropping out of the labor force for good, it might mean there is less slack in the job market -- and thus more inflationary pressure building -- than commonly believed.


Huh? Then why didn't the data reflect the dropout rate since when you think about it, early retirement and women dropping out of the workforce is more of a consequence of the economy than a personal lifestyle choice.

With all this said. Gallup came out with yet another poll on this topic and it, I believe, is closer to the mark than anything else. Gallup had the chutzpah to actually ask businesses if they were hiring and if not, why. Fascinating results.

First, are you hiring?



It is pretty evenly split, but 42% aren't hiring as many workers as needed. Why not?



This is a very striking result. The primary reasons they aren't hiring is that they don't see demand and are worried about their ability to support additional payroll. The other reasons are also very significant. Sixty-two percent say they can't find qualified workers. Since much expansion is coming from manufacturing, why aren't workers training for the right jobs? Fifty-one percent are worried about ObamaCare. As Lincoln said, you can fool some of the people...

And the last data was that the main reason they are hiring is to replace a worker who left:



In other words they are afraid to expand. Justifiably so.

I would say this is a negative report and it supports my idea that manufacturing isn't leading the economy, at least not yet. I would say look for more disappointment in the unemployment statistics in the future.

No positions in stocks mentioned.

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