Updated Outlook: The Economic Downturn Is Ongoing. Just in time to boost the confidence of Holiday Season shoppers, the Bureau of Labor Statistics (BLS) announced a 0.2% downturn in the November Unemployment rate, with November payroll employment virtually unchanged. Those results are nonsense, if taken literally. As discussed in Commentary 262, the better-quality series that underlie the government’s employment and unemployment reporting are showing ongoing deterioration, in particular the various help-wanted advertising and purchasing managers surveys.

Important to keep in mind is that the severity and duration of the current economic downturn — unprecedented in the post World War II era — has led to serious data distortions, particularly tied to seasonal adjustments. Such was noted recently by the Federal Reserve for some of its series, where patterns of sharp variations in reporting of activity a year ago — now being built into current seasonal-adjustment factors — are anything but regular seasonal patterns. Giving the BLS the benefit of the doubt on the unemployment rate, October’s above-consensus reported 0.4% surge in the headline unemployment rate likely was spiked by bad seasonals, which reversed in the November reporting. Such was touched upon in Commentary 262 on the outlook for today’s report. The upturn in the unemployment rate should return with December’s reporting. 

As discussed at the time, the earlier drop in the reported unemployment from 9.5% in July 2009, to 9.4% in August, was due to a seasonal-factor distortion tied to irregular timing for retooling of automobile production lines. Those distortions reversed in September, with the unemployment rate jumping to 9.7%.  Until stability returns to the unemployment-rate reporting, using a three-month moving average makes sense in terms of assessing direction.  The seasonally-unadjusted series does not get revised, except for changes to population estimates. The seasonally-adjusted series, however, has its seasonal factors restated annually, and the next revision there likely will smooth out some of the recent variability.   

On the other hand, the magnitude of today’s reported swing in the unemployment rate is reminiscent of another series in another time. In late-1987 and early-1988, a similar pattern (not tied to seasonals) of sharp deterioration and sudden improvement was orchestrated for the trade deficit. Such was an effort to support massive central bank intervention in favor of the U.S. dollar.

What happened with the November payroll survey is another matter. Despite the announcement of a pending 824,000 downward benchmark revision to May 2009, which means a likely ongoing downward revision of 200,000 jobs per month to current monthly payroll estimates, September and October data were revised upwards, sharply. The benchmark revisions and current corrections will not be published until February 2010. In the interim, the unadjusted payroll levels revised upward in October by 103,040, and the October adjusted level was revised higher by 159,000, well beyond the government’s 95% confidence interval of +/- 129,000 jobs, and again warped by monthly revisions to the concurrent seasonal adjustment factors, which get reset each month. Such reverses the pattern seen in the last two years. Where the jobs-loss data were consistently being understated, now the losses are being overstated, if the numbers are to be believed.

There are serious flaws evident in the payroll employment survey, ranging from the inability of the birth-death model to handle a recession, to the use of a concurrent seasonal factor adjustment, which allows outright gaming of the numbers, should someone choose to do so. The short-term reporting of payroll data is misleading — virtually worthless — at the moment. Eventually, with revisions, a more accurate accounting will follow.        

The broad outlook on the economy and the market is unchanged. Greater detail there is explored in the updated hyperinflation report.

November Employment/Unemployment Reporting Heavily Distorted. As discussed in the opening comments, depression-warped seasonal factors likely were much more responsible for the improved Numbers employment and unemployment than any actual turn in economic activity.

Payroll Survey. The BLS reported a statistically-insignificant, seasonally-adjusted jobs loss of 11,000 (up by 148,000 net of revisions) +/- 129,000 (95% confidence interval) for November 2009, following a revised 111,000 (previously 190,000) jobs loss in October.

From peak-to-trough (the peak month was December 2007; the current month of November also is the short-lived trough of the current cycle), payroll employment has declined by a seasonally-adjusted 7,156,000 jobs, or by 5.2%. Net of the pending benchmark revision, the peak-to-trough decline likely has been closer to 9 million jobs or 6.5%.

As the pace of reported monthly decline has slowed against year-ago comparisons, year-to-year contraction (unadjusted) in total nonfarm payrolls narrowed to 3.4% in November, from a revised 3.9% (was 4.0%) in October, and a 60-year low of a 4.4% decline in August. Adjusted for the benchmark revision due for release in February 2010, however, November’s annual decline likely was around 5.6%, still the most severe annual contraction seen since the production shutdown following World War II, which hit a record trough of a 7.6% contraction in September 1945. Disallowing the post-war shutdown as a normal business cycle, the current annual decline would be the worst since the Great Depression.    

Underlying economic series (such as the purchasing managers and help-wanted advertising surveys, and new claims for unemployment insurance) remain consistent with a monthly jobs loss of roughly 500,000. Such reflects what should be close to current reporting, with near-term revisions, and with aggregated birth-death model understatement of roughly 200,000 jobs per month. The current report, however, is well removed from other indications of underlying reality.

Concurrent Seasonal Factor Bias.  The pattern of impossible biases being built into the headline monthly payroll employment continued its reversal for the fourth month in the last five, with a downside bias of 98,000 jobs in November 2009 reporting. Instead of the headline jobs loss of 11,000, consistent application of seasonal-adjustment factors — net of what I call the concurrent seasonal factor bias (CSFB) — would have shown an outright monthly jobs gain of 87,000. This factor has generated an upside reporting bias seen in seven of the last 12 months, with a rolling 12-month total upside headline-number bias of 312,000. The recent reversals appear to reflect a shift in the nature payroll reporting, which will be assessed in shortly in a future Commentary. A worksheet on this is available upon request. (See SGS Newsletter No. 50, for further background.)

Birth-Death/Bias Factor Adjustment.  As discussed in recent months and in SGS Newsletter No. 51, Birth-Death Model biases tend to overstate payroll employment during recessions. The flaws here were confirmed with the BLS estimate of an 824,000 downside benchmark revision for May 2009, reported two months ago, with a suggested ongoing monthly understatement of 200,000 or more in jobs losses per month. The BLS indicated that their underlying assumptions to the Birth-Death Model were missing certain jobs losses. Specifically, if a company fails to report its payroll employment, the BLS assumes the company did not go out of business and assigns it a level of employment commensurate with its prior reporting and industry trends.

Never designed to handle the downside pressures from an economic contraction — in addition to the flawed underlying assumptions — the model adds a fairly consistent upside bias to the payroll levels each year, currently averaging about 74,000 jobs per month. The unadjusted November 2009 bias was a monthly addition of 30,000 jobs, up from 19,000 the year before, but down from 86,000 in October 2009.

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 employment rose by 227,000 in October, versus a decline of 589,000 in September. As discussed in the opening comments, these data likely have been distorted by the depression’s impact on seasonal-adjustment factors. Looking at a three-month moving average of the seasonally-adjusted headline numbers likely is a worthwhile venture, until the seasonal factor adjustments are stabilized. On a three-month moving-average basis, November employment was down by 382,000, versus a decline of 589,000 (same as the monthly number) in October.

The October 2009 seasonally-adjusted U.3 unemployment rate showed a statistically-insignificant decrease to 9.99% +/- 0.23% (95% confidence interval), from 10.20% in October.  Unadjusted U.3 eased to 9.4% in November from 9.5% in October. The three-moving average for the seasonally-adjusted series was 10.01% in November versus 9.90% in October.  

The broader November U.6 unemployment eased to an adjusted 17.2% (16.4% unadjusted), from 17.5% (16.3% unadjusted) in October.

During the Clinton Administration, "discouraged workers" — those who had given up looking for a job because there were no jobs to be had — were redefined so as to be counted only if they had been "discouraged" for less than a year. This time qualification defined away the long-term discouraged workers. The remaining short-term discouraged workers (less than one year) are included in U.6. 

Adding the excluded long-term discouraged workers back into the total unemployed, unemployment — more in line with common experience as estimated by the SGS-Alternate Unemployment Measure — eased to about 21.8% in November, from 22.1% in October. See the Alternate Data tab at www.shadowstats.com for a graph and more detail.

While 21.8% unemployment might raise questions in terms of a comparison with the purported peak unemployment in the Great Depression (1933) of 25%, the SGS level likely is about as bad as the peak unemployment seen in the 1973 to 1975 recession. The Great Depression unemployment rate was estimated well after the fact, with 27% of those employed working on farms. Today, less that 2% work on farms. Accordingly, for purposes of a Great Depression comparison, I would look at the estimated peak nonfarm unemployment rate in 1933 of 34% to 35%.

Fed Renews Monetary Base Surge as Broad Money Growth Continues to Falter.  Despite some suggestions of the Fed preparing to ease back on its extraordinary systemic-liquefaction efforts of the last year, the monetary base jumped to a new high in the two-week period ending December 2nd. Such followed a minor pullback in the prior period.

As shown in the above graph of the St. Louis Fed’s Adjusted Monetary Base (seasonally adjusted), the level of the monetary base has been pushed to a record high, at an annualized rate of growth since the series’ near-term trough in the two-week period ended August 16th, more than three months ago, of 102%. Such was up from an annualized pace of 96% in the prior two week period, but down from the 126% annualized pace in the November 4th period. The monetary base consists of currency in circulation plus bank reserves, and it is the Fed’s traditional tool for targeting money supply growth.

The money supply measures, however, continue to be immune to the surge in bank reserves, with banks leaving heavy excess reserves on deposit with the Fed, rather than lending into the normal stream of commerce. Formal initial monthly average and year-to-year percent change estimates for M1, M2 and the SGS-Ongoing M3 for November will be published this weekend on the Alternate Data tab at www.shadowstats.com. 

While M1 and M2 (which includes M1) appear to have risen again month-to-month for November, year-to-year growth has softened further. November M3, however, appears likely to show its fifth consecutive month-to-month decline, with year-to-year change slowing to around 1.5% from an estimated 1.9% in October. There have large declines in institutional money funds and large time deposits, which more than have offset small growth in M2, and which should pull annual M3 growth into negative territory come December.

Week Ahead. Given the underlying reality of a weaker economy and a more serious inflation problem than generally is expected by the financial markets, risks to reporting will tend towards higher-than-expected inflation and weaker-than-expected economic reporting in the month ahead. Such is true especially for economic reporting net of prior-period revisions.

Trade Balance (October 2009). Due for release on Thursday, December 10th, the October trade deficit should continue to widen, perhaps beyond consensus expectations of minor deterioration (Briefing.com), adding some downside pressure to fourth-quarter GDP growth estimates. The magnitude of deterioration depends to a certain extent on catch-up reporting on what appears to be some lagging paperwork flows on import activity.

Retail Sales (November 2009). Due for release on Friday, December 11th, November retail sales are expected to show a monthly gain of 0.5%, per Briefing.com, against October’s 1.4%. Reporting risks are to the downside of consensus, and, net of inflation adjustment, retail sales should show no meaningful monthly growth, with ongoing year-to-year remaining in contraction.