The latest employment report was filled with something for just about everyone needing to spin the data for either a “bullish” or “bearish” viewpoint. Joe Weisenthal wrote for Business Insider that:
“After accounting for the annual adjustment to the population controls, the civilian labor force rose by 499,000 in January, and the labor force participation rate edged up to 63.0 percent. Total employment, as measured by the household survey, increased by 616,000 over the month, and the employment-population ratio increased by 0.2 percentage point to 58.8 percent.”
On the opposite side was the NY TImes stating:
“Wages are stuck, and barely rose at all in 2013. They were up 1.9 percent last year, or a mere 0.4 percent after accounting for inflation. Not only was that increase even smaller than the one recorded in 2012, it was half the normal rate of wage gains in the two decades before the last recession.
The stagnation helps explain why many people feel apprehensive… white-collar workers did a bit worse than blue-collar workers last year in terms of wage growth…”
The markets have come under pressure since the Fed beginning withdrawing monetary accommodations. Therefore, the only thing that matters to market participants currently is whether the jobs report was “weak” enough to make them stop.
However, from a larger perspective the recent spate of employment data may be signaling something much more important. It is also something that I have discussed recently and was confirmed via a note from Goldman Sachs last week:
“It is hard to avoid the reality that the overall macro data picture is bleaker now than a few months ago,” says Aleksandar Timcenko, a vice president on the global macro strategy team at Goldman Sachs.
Since employment is a reflection of economic activity, the data is suggesting that economic growth may indeed be slowing. However, it is hard to get an accurate picture of the underlying employment data due to the statistical manipulations of seasonally adjusting the data. For example, we are currently experiencing one of the coldest winters in years with record levels of snowfall. Such weather will directly impact construction related employment that is primarily done outdoors. Yet, in the January report it showed a seasonally adjusted increase in construction jobs of 48,000.
There is also the Birth/Death Model adjustments which seeks to account for the starts and failures of small businesses that occur in the economy each month. In January, that model adjustment to employment showed a decrease of only 307,000 jobs. Yet, in January of 2013 it reduced employment by 315,000 while the 5-year average has been 377,000. In other words, had the BLS used the 5-year average of the January Birth/Death adjustment the employment report would have only showed an increase of 43,000 jobs instead of the already disappointing 113,000.
Early last year I wrote “I Can Handle The Truth On Employment.” In this missive I presented an alternative method for analyzing employment data utilizing the non-seasonally adjusted data to remove some of the obfuscation. I stated:
“With the system of measuring employment being overly complicated, and subject to a wide degree of interpretation and manipulation, it is not surprising that the monthly reports draw such emotional arguments. In reality what we all want to know is whether employment is getting better or worse? Are businesses hiring people and putting them work at a rate faster than growth of the working age population and what is the trend of employment overall? To do this, I suggest we throw out the seasonal adjustments, do away with the birth/death adjustments and just look at the raw data.“
The seasonal adjustments are used by the BLS to smooth otherwise very volatile data. However, using a simpler approach, such as a 12-month moving average, will accomplish the same result without the “mathematical Olympics.” The chart below shows the long term analysis comparing the BLS seasonally adjusted data on an annual net change basis as compared to using the 12-month average of the non-seasonally adjusted data.
As you can see, there is an extremely high correlation between the two measures. However, what is most notable is that it appears that the growth in employment has slowed and stagnated. The next chart is the same data but only from 1995 to present.
You can clearly see that employment growth has not only peaked, but declined over the last couple of months. That softness aligns with the recent spate of weakness in the STA Economic Output Composite Index as shown below. (For details on its construction read this)
The trend of economic growth has deteriorated in recent months despite hopes by the majority of economists. I have labeled events that have contributed to the rolling recoveries and slowdowns in recent years.
The current bouts of freezing weather, combined with the onset of the Affordable Care Act, will likely suppress employment in the months ahead. Is the current overall employment picture improving – the unadjusted data says “yes,” but we may be witnessing the limits of the current economic expansion.
The non-seasonally adjusted data can tell us a story if we allow it to. Maybe, it is time to get rid of seasonal adjustments for a more normalized smoothing process. If you are like me, we can handle the “truth” and are likely to make better decisions because of it.
Courtesy: Lance Roberts
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