FLASH UPDATE - November 7, 2008

JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

FLASH UPDATE

November 7, 2008

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Bureau of Labor Statistics Plays Post-Election Catch-Up

October 240K Payroll Loss: 419K Loss Net of Revisions,
308K Loss Net of Concurrent Seasonal Factor Bias

Broad Unemployment Rate Highest of Current Series

Monetary Base Surge Continues: Up 48.2% Year/Year

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PLEASE NOTE: More complete detail on the recent economic releases follows, along with a broad review of prospects for U.S. economic activity and inflation, in the upcoming full SGS newsletter. 
– Best wishes to all, John Williams

Political Gimmicks or Happy Coincidence? Against a background of a rapidly deepening recession and intensifying weakness in other key employment/unemployment indicators, the Bureau of Labor Statistics (BLS) reported this morning (November 7th) that October seasonally-adjusted payrolls plunged and that the unemployment rate soared, a picture much closer than usual to reality, but still something shy of it.

September’s employment report — the last before the election — showed a less severe than expected drop in employment and an unchanged unemployment rate.  Now, with October’s reporting (the first since the election), September’s payroll data underwent extreme negative revisions, and October showed a much larger than expected surge in unemployment. History would suggest this pattern is more a function of catch-up following political manipulation of the data, than it is of normal variation in monthly reporting. Also, as suggested by the ongoing upside concurrent seasonal bias, misreporting of the data continues.

As a separate matter to be discussed in the upcoming newsletter, the BLS has announced that its annual benchmark revision will adjust for an unbelievably low 29,000 jobs overstatement as of March 2008.

Payroll Survey. The BLS reported a statistically-significant, seasonally-adjusted jobs loss of 240,000 (down 419,000 net of revisions) +/- 129,000 for October, following a revised 284,000 (previously 159,000) jobs loss in September. Annual contraction (unadjusted) in total nonfarm payrolls continued to deepen, down 0.85% in October, versus a revised 0.52% (previously 0.43%) in September. The seasonally-adjusted series also contracted year-to-year, down by 0.78% in October, versus a 0.51% (previously 0.38%) contraction in September.

Concurrent Seasonal Factor Bias. The pattern of impossible biases (see the Reporting/Market Focus in the June 10, 2008 SGS Newsletter) being built into the headline payroll employment changes intensified with October reporting. Instead of the headline jobs loss of 240,000, consistent application of seasonal-adjustment factors — net of what we are calling the concurrent seasonal adjustment bias — would have shown a more-severe monthly jobs loss of about 308,000. This upside reporting bias has been seen in 11 of the last 12 months, with a rolling 12-month total upside headline-number bias of 678,000.

Birth-Death/Bias Factor Adjustment. A minor element in October that added upside pressure to the payroll number was the monthly bias factor (birth-death model). Never designed to handle the downside pressures from a recession, the model added a 71,000 upside jobs bias to October 2008 (same amount as in October 2007), and following a net upside bias of 42,000 jobs in September 2008. The process boosted financial-activities and construction jobs by 13,000 and 7,000, respectively, for the month. Although the adjustments are made to the unadjusted series, they generally flow through at the same magnitude in the seasonally-adjusted series. 

Household Survey.  The usually statistically-sounder household survey, which counts the number of people with jobs, as opposed to the payroll survey that counts the number of jobs (including multiple job holders), showed household employment fell by 297,000 in October, following a 222,000 loss in September.

The October 2008 seasonally-adjusted U.3 unemployment rate showed a statistically-significant increase to 6.50% +/- 0.23% from 6.12% in September.  Unadjusted, U.3 rose to 6.1% in October, versus 6.0% in September.  The broader October U.6 unemployment rate jumped to an adjusted 11.8% (11.1% unadjusted) from 11.0% (10.6% unadjusted) in September.  Refigured for the bulk of the "discouraged workers" defined away during the Clinton Administration, actual unemployment, as estimated by the SGS-Alternate Unemployment Measure, rose to 15.8% in October, up from 15.0% in September.

In 1994, the BLS completely redesigned and redefined the unemployment series and all its measures, broad and narrow, so that the new series going forward could not be compared with the old series. I still am struggling to take my alternate measure back before 1994, where finding consistent and good data is a major problem. That said, the U.6 broad measure of 11.8% unemployment is the highest since the same reading in January 1994 (that was the first reading under the new definitions, during a period of unofficial recession).   

Reserves and Monetary Base Surge, Broad Money Measures Still Lag. Based on Federal Reserve Board (FRB) reporting last night (H.3) and related St. Louis Fed calculations, reflecting daily averages for the two-week period ended November 5th, the seasonally-adjusted St. Louis Fed Monetary Base — the traditional tool for adjusting money supply growth — rose by 7.0% (annualizes to over 3200%) between the two-week periods ended October 22nd and November 5th. Year-to-year growth for the latest two week period was 48.2%, up from 38.0% year-to-year in the prior period.

Total reserves of depository institutions (FRB, not seasonally adjusted) surged again, rising to $415.7 billion from $327.6 billion in the prior two-week period, and it was up from $44.2 billion as recently as September 10th. Of significance, required reserves rose to $52.1 billion in the latest period, up from $45.9 billion in the prior period and from $41.9 billion in the two weeks ended September 10th. This suggests that the excess reserves have started entering the system, albeit slowly.

FRB reporting (H.6) on the money supply (M2 and institutional money funds are M3 components), lags in time, with information up through October 27th. With large time deposit estimates released at the end of today, a rough estimate of SGS Ongoing-M3 annual growth for October will be included in the newsletter, but it likely will be near 11%, down from 13.1% in September. That growth rate should prove to be the trough of the current cycle, as the Fed’s extreme easing begins to loosen credit and allows cash increasingly to flow into bank accounts.

This area will be discussed in greater depth in the newsletter. Despite the monthly decline looming in October CPI from a collapse in gasoline prices, and despite a rapidly deteriorating recession, the general outlook over the next six months to a year remains highly inflationary.  

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