Wednesday, September 7, 2011

Why the Terrible Payroll Report?

The Labor Department’s (BLS) August unemployment report showing ZERO (0) nonfarm payrolls growth was a shocker, when seasonally adjusted. Though expectations were low, no one had predicted absolutely no increase in hiring. But wait a minute. Aren’t 4 million jobs created and 4 million jobs lost on average every month, according to the Labor Department?

Ah, there’s the rub. When Labor “seasonally adjusts” the jobs’ numbers it is really counting any increase or decrease over normal hiring for that season, as we’ve said in past columns. For instance, during the summer months, since it finds a seasonal increase of approx. 1 million jobs from youths entering the labor force, it subtracts that 1 million from any actual increase in hiring before calculating the final Household survey increase or decrease via algorithmic formulas. This is while Establishment survey of nonfarm payrolls seasonal adjustment actually added jobs in August, as education payrolls can decline as much as 20 percent during the summer months, necessitating adding a seasonal adjustment factor.


We see more with JOLTS, the July BLS Job Openings and Labor Turnover Survey (It lags by one month), which shows the actual job totals. The number of job openings surprised us by climbing to a new cyclical high of 3.228 million positions, and the quit rate was a little higher than expected with 1.95 million workers voluntarily leaving their jobs for other opportunities. However, the number of new hires in the month slipped back to a six month low of 3.984 million, suggesting slightly less dynamism in recent months, said Wrightson ICAP. So employment numbers are at best an estimation, and can be the elephant in the room when attempting to predict future economic activity. In fact, the BLS itself says that it can only be 90 percent to get within 100,000 of the real numbers!


Chart: Wrightson ICAP

Since the seasonal adjustment is never very accurate it keeps getting adjusted when the more accurate state initial unemployment insurance claims come in. For instance, July’s payrolls were adjusted downward from 117,000 to 85,000, and June dropped from 46,000 to 20,000 net nonfarm payroll jobs. And Barron’s economist Gene Epstein mentions that as many as 75,000 private payrolls jobs might have been lost by the (just settled) Verizon strike in August.

And both the service and manufacturing sectors are showing more strength in August. An unexpected one-point increase in orders contributed to an unexpected rebound in the ISM non-manufacturing survey. The 0.6 increase to 53.3 was small but surprising nonetheless. The employment index fell by less than one point to 51.6, which, over time would be consistent with somewhat stronger payroll growth than was reported on Friday.


Chart: Wrightson ICAP

The overall business activity index, which is the most subjective component, slipped just half a point to 55.6. That index remains a couple of points above the recent lows reached in the April-June period, and suggests that the non-manufacturing sector does not see signs of an imminent collapse.

Another indicator arguing against a double dip is the Chicago Purchasing Managers Index. Business in the Chicago area this month did not slow as much as expected with the purchasers' index coming in at 56.5, down only 2.3 points from July. August's rate is comfortably over 50 to indicate solid growth in the area's economy though at a slightly slower rate than July. Chicago's sample, which includes both non-manufacturing and manufacturing firms, is considered a good proxy for overall GDP growth.


Econoday reports it shows solid but slowing growth for new orders and production. The new orders index rose to 56.9, compared to 59.4 in July. Production came in at 57.8, down from 64.3 in July but well over breakeven. Supplier deliveries slower substantially which is a sign of strong business activity. These results were surprisingly solid given the run of negative indications on August business conditions that included extremely weak readings on consumer spirits and a run of regional manufacturing reports reporting contraction.

Why aren’t more jobs being created? Corporations with a $2 trillion cash hoard and record profits aren’t the problem. They would hire more if they could sell more. So additional demand has to be created by financing additional projects that create private jobs, like rebuilding our aging infrastructure. The American Society of Civil Engineers has calculated that the deferred maintenance of our public transportation system alone will cost $2 trillion to bring up to modern standards.


Inflation also isn’t the problem. The 10-year Treasury bond yield is now under 2 percent. And Nobelist Paul Krugman said recently there are only 2 numbers that tell us what we have to do to grow the economy. The record low yield of the 10-year Treasury Bond, and 0 net nonfarm payroll growth in August. So the problem at the moment is the lack of political will in Congress to create more jobs, not the private sector who would certainly hire more workers if they had work for them.

Harlan Green © 2011


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