FLASH UPDATE - July 3, 2008

JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

FLASH UPDATE

July 3, 2008

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June Payrolls Turned Negative Year-to-Year

Monthly Payrolls Dropped by 147,000 Net of Concurrent Seasonal Adjustment Bias

Broadest Unemployment Rate Jumps by 0.2%

Purchasing Managers Manufacturing Index "Gain" Due to Reweightings

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Employment Circumstance Shows Deepening Downturn. There was little good news for the economy in this morning’s June 2008 employment report. Year-to-year change in payrolls turns negative only during recessions, and the June numbers showed the first such decline of the current recession, in unadjusted payroll levels. The reported sixth consecutive decline in monthly payrolls, as of June, continued to indicate a recession in place, as likely will be recognized by the National Bureau of Economic Research (official arbiter of recessions), while May’s sharp unemployment rate deterioration remained in place, with June’s level holding at May’s reading. Even so, the weaknesses in the June employment report appear to be understated, as discussed in the various sections below.

Payroll Survey. The Bureau of Labor Statistics (BLS) reported a statistically-insignificant, seasonally-adjusted jobs loss of 62,000 (114,000 net of revisions) +/- 129,000 for June 2008, following a revised 62,000 (previously 49,000) jobs loss in May. Annual change in total nonfarm payrolls turned negative, down 0.12% in June, versus a revised gain of 0.06% (was 0.08%) in May.

Concurrent Seasonal Factor Bias. The pattern of impossible biases (see the Reporting/Market Focus in the latest SGS Newsletter) being built into the headline payroll employment changes was seen once again with the June report. Instead of the near-consensus headline June jobs loss of 62,000, consistent application of seasonal-adjustment factors — net of what we are calling the concurrent seasonal adjustment bias — would have shown a monthly jobs loss of about 147,000. The implication here is of some ongoing political manipulation of the data, where the cumulative 12-month-rolling upside headline bias increased from 595,000 in May to 659,000 in June and has been seen in 11 of the past 12 months. A worksheet on this is available upon request.

Birth-Death/Bias Factor Adjustment. Another element continuing to add upside pressure to the numbers was the monthly bias factor (birth-death model), which never was designed to handle the downside pressures from a recession. The June 2008 bias was a net addition of 177,000 jobs (up from the prior June’s 155,000 upside bias), following a net addition of 217,000 jobs in May 2008. The June add-factor mindlessly continued to spike construction jobs (up by 29,000) and financial activities jobs (up by 8,000), irrespective of ongoing anecdotal evidence of trouble in those areas.  

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 those of multiple job holders), showed household employment fell by 155,000 in June, after falling by 285,000 in May.

The June 2008 seasonally-adjusted U.3 unemployment rate showed a statistically-insignificant firming to 5.50% +/- 0.23% from 5.49% in May. Unadjusted, U.3 increased to 5.7% in June versus 5.2% in May. The broader U.6 unemployment rate rose to an adjusted 9.9% (10.3% unadjusted) in June versus 9.7% (9.4% unadjusted) in May. 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 13.9% in June from 13.7% in May.

Employment Environment. The employment deterioration in June ran in the right direction but again still was shy of reality, per trends indicated by some of the better-quality employment-environment indicators: May help-wanted advertising declined anew, setting a new historic low for the series that dates back to Harry Truman’s era; new claims for unemployment insurance have continued to surge sharply in terms of annual growth; and a deepening recession-level employment reading was seen for the June manufacturing purchasing managers survey.

Purchasing Managers Manufacturing Index Shows Recession and Explosive Inflation. The June purchasing managers manufacturing index continued showing recession and galloping inflation, despite a quirk in the numbers. As discussed in the Reporting/Market Focus of the February 11, 2008 SGS Newsletter, the ISM re-weighted its composite indices back in January, so that they would reflect better the government’s GDP reporting. Unfortunately, the GDP is a particularly poor-quality series, and the ISM reweightings effectively debased the quality of an otherwise very fine survey.

As reported, the composite purchasing managers survey index for manufacturing rose to 50.2 in June, from 49.6 in May. A reading above 50.0 signals an expanding manufacturing sector. Based on the pre-January 2008 weightings, however, the composite index for June would have been 49.8, still in contraction territory. 

Nonetheless, the key components of the index, shy of questionable seasonal adjustments, were not directly affected by the January reweightings. The new orders component eased to 49.6 in June, from 49.7 in May, while the employment component sank to 43.7, down from 45.5. Again readings below 50.0 indicate contraction.

On the inflation front, the prices paid component jumped to its highest level since May 2004, at 91.5 in June 2008, up from 87.0 the month before.

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As discussed in Monday’s (June 30th) Flash Update, the broad outlook is unchanged. Further detail will follow in the pending newsletter.

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The SGS-Alternate Unemployment Measure will be updated this weekend on the Alternate Data tab of www.shadowstats.com

Publication of the next regular newsletter should follow this Fourth of July weekend. Intervening Flash Updates and Alerts will be posted as needed. All postings will be advised by e-mail.

–Best wishes to all for a great Fourth of July!  John Williams