March Employment Report Looks Stronger on the Surface. Net of the temporary hiring of part-time and intermittent workers for the 2010 census, March payrolls were reported up by 114,000. The latest data also included upside revisions totaling 62,000 to prior January and February reporting. While the gains were not statistically significant, part of the relatively stronger March report has been attributed to rebound effects from February’s blizzards. While I would contend that blizzard effects were minimal, any impact there would be non-recurring in April. As discussed in the Birth-Death/Bias Factor section, however, I estimate that the government currently overestimates monthly payroll growth by at least 250,000, which suggests that more-accurate current reporting still would be very much in negative territory. On the unemployment-rate side, the broader measures increased, and the headline U.3 number would have too, but for some rounding and census hiring.

Real (adjusted for inflation), broad systemic liquidity, as reflected in M3 (SGS Continuing Estimate), continues to shrink year-to-year. As of March, the series appears to be down by the largest percentage in modern reporting. The negative effects of this liquidity squeeze on the economy should become increasingly obvious in the next month or so, including subsequent employment data, ex-census. More will follow next week in next week’s Commentary. The general outlook remains unchanged.

Payroll Survey. The Bureau of Labor Statistics (BLS) reported this morning (April 2nd) a statistically-significant, seasonally-adjusted jobs gain of 162,000 (up by 224,000 net of revisions) +/- 129,000 (95% confidence interval) for March 2010, following a revised 14,000 (previously 36,000) jobs loss in February. 

Net of the temporary hiring of census workers, which will reverse out fully in the second half of the year, the March payroll gain was a statistically-insignificant 114,000 gain versus a 29,000 jobs loss in February. Census hiring will become an increasingly major factor boosting relative payroll levels in the next several months.

From peak-to-trough (the peak month was December 2007; February 2010 is the still-short-lived trough of the current cycle), payroll employment has declined by a seasonally-adjusted 8,363,000 jobs, or 6.1%.

The pace of reported monthly decline has continued to slow sharply against year-ago comparisons, symptomatic of an increasing shift to bottom-bouncing in the payroll series. The year-to-year contraction (unadjusted) in total nonfarm payrolls narrowed to 1.7% (1.8% net of census effects) in March, versus an unrevised 2.5% decline in February, and from a post-World War II record 5.0% decline in July 2009. The July 2009 decline was the most severe annual contraction seen since the production shutdown at the end of World War II, which reflected a trough of a 7.6% annual 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.  The payroll graph reflects the numbers as reported, with no adjustment for census hiring impact.    

 

Birth-Death/Bias Factor Adjustment.  As discussed in previous writings, the Birth-Death Model biases tend to overstate payroll employment levels — to understate employment declines — during recessions. The flaws were confirmed by the nature of BLS’s massive benchmark revision published with the January 2010 report, where the BLS had indicated that the underlying assumptions to the Birth-Death Model were missing certain jobs losses.

Although the upside bias was scaled down some from last year as a result of the reporting errors, the Birth-Death Model survives and remains a major distorting factor in monthly payroll reporting, likely adding in excess of 250,000 phantom jobs per month at present. Such misreporting, however, will not be adjusted at all until the next benchmark revision is published in February 2011, after the November 2010 elections.

The unsupportable premise that jobs created by start-up companies in this downturn have more than offset jobs lost by companies going out of business, continues. So, if a company fails to report its payrolls because it has gone out of business, the BLS assumes it still has its previously-reported employees and adjusts those numbers for the trend in the company’s industry. The "surplus" jobs created by start-up firms, which get added on to the payroll estimates each month as a special add-factor, were revised lower in the most-recent benchmark — the only portion of the model that has been scaled back — averaging at present roughly an extra 50,000 seasonally-adjusted jobs per month. This monthly bias should be negative by 200,000 or so, on average. Since it is not, again, the BLS continues regularly to overestimate monthly growth in payroll employment by roughly 250,000 jobs.

That said, the unadjusted Marc 2010 bias was a monthly addition of 81,000 jobs, versus a pre-benchmark addition of 114,000 jobs in March 2009, and against a monthly addition of 97,000 jobs in February 2010.

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 a seasonally-adjusted monthly employment gain in March of 264,000, versus an estimated February gain of 308,000.

The March 2010 seasonally-adjusted U.3 unemployment rate was reported at 9.75% (rounds to 9.7%) +/- 0.23% (95% confidence interval). The 0.06% gain (rounds to 0.1%), however, was statistically insignificant versus February’s estimate of 9.69%. Unadjusted U.3 was reported at 10.2% in March, down from 10.4% in February. Distorted seasonal factors appear to be an ongoing issue, but that should be resolved in the next month, as a seasonal factor catch-up reverses some of the recent relatively happy news with an exaggerated jump to a higher U.3 unemployment rate, net of census hiring impact.

The temporary census hiring of 48,000 in March would add only 0.03% to the March unemployment rate, if all the hired individuals were reflected as newly employed in the household survey (as opposed to already holding other part-time employment in the survey). The reported March 2010 seasonally-adjusted unemployment rate was extremely close to rounding up to 9.8% (9.7492%). Accordingly, if just 2,000 of the 48,000 new census workers were reflected as newly employed in the March household survey (a virtual certainty), then, net of census impact, the March U-3 unemployment rate rounded up to 9.8%, an increase over February’s 9.7%.

Removed from the media and market focus of the headline U.3 unemployment number, the broader unemployment measures do not seem to be suffering the same level of seasonal issues, and are much less impacted by census issues, with their non-U.3 components. March U.6 unemployment rose to an adjusted 16.9% (eased to 17.5% unadjusted), from 16.8% (17.9% unadjusted) in February.

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 — rose to about 21.7% in March from 21.6% in February. See the Alternate Data tab at www.shadowstats.com for a graph and more detail.

While 21.7% 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%.

Week Ahead. Given the underlying reality of a weaker economy (and likely re-intensifying downturn) and more serious inflation problems than generally are expected by the financial markets, risks to reporting will tend towards higher-than-expected inflation and weaker-than-expected economic reporting in the months ahead.  Such is true especially for economic reporting net of prior-period revisions. That said there are no major economic releases due in the week ahead.