Strong Data, Yet Worst of Economic and Systemic Crises Lies Ahead. Despite this morning’s (May 7th) happy employment report, the economy remains at the brink of an intensified or renewed downturn, and broad liquidity problems signal ongoing serious systemic risks. While reported April payroll data were strong — with significant upside revisions to prior payroll reporting in February and March — the suggested jobs surge reflected overly optimistic assumptions and census hiring, as well as likely ongoing seasonal distortions. Further, the gains ran counter to several important and politically-independent related series. For example, the Conference Board’s March help-wanted advertising (newspapers), which leads April employment, fell for the first time in six months, dropping from 10 to 9, matching the record low reading for the series last year. Also from the Conference Board, April new online help-wanted advertising declined for the first time in five months, down by 1.0%. While the manufacturers purchasing managers survey for April showed rising employment, the broader services index showed contracting employment.

At work in the government’s employment and unemployment reporting likely still are severe seasonal factor distortions, continuing from the impact of the extraordinary month-to-month declines seen in jobs a year ago (seasonal adjustments are weighted most heavily by year-ago patterns), in conjunction with some very happy assumptions. The latter circumstance was evidenced by the April Birth-Death Model adjustments. As described below and in earlier writings, the entire birth-death (of companies) concept and resulting monthly fudge factors reflect guesstimates. Yet, usually, the add-factors in a given month are reasonably close to what was used the year before. In April 2010, however, the monthly add-factors were upped to an aggregate 188,000 jobs for the month, from the 126,000 used in April 2009. Considering that the change reflects nothing more than happy assumptions, someone decided to create an additional 62,000 jobs for April 2010 out of thin air. 

In April of 2000, census hiring had accumulated to 181,000. As of April 2010, cumulative hiring was 154,000, of which 66,000 was in April alone. Apparently the biggest short-term boost from the addition of the temporary and intermittent census workers will be in next month’s reporting (also discussed below). On the unemployment front, big swings in the labor force data also are suggestive of seasonal factor distortions (the distortions go both ways). 

There is no easy way of determining what other "assumptions" have been worked into the current numbers, but given the latest data, the underlying outlook by the Bureau of Labor Statistics appears to have shifted sharply from recession to recovery. Add in political needs and the tendency towards positive biases in economic reporting, and there is a fair bet of overly-optimistic reporting here. With the likely ongoing seasonal issues, I would put little credence in what was reported either for April payrolls or for April unemployment. The payrolls will face later benchmark revisions, the unemployment picture eventually should stabilize along with the seasonal-adjustment factors.

Also discussed below is continued deterioration in broad money growth on an annual basis, both before and after inflation adjustment. The real annual decline remains a solid signal for intensified economic downturn in the near future. A down economy in 2010 will blow apart current projections for the federal deficit and Treasury funding needs, as well as any confidence in banking-system solvency. Where the U.S. equity markets appear to be shifting to a more volatile and negative tone, such movement likely would be exacerbated meaningfully by broad market recognition of a renewed downturn in business activity.

The systemic risks here are of such a scope as to be considered a threat to national security. Such was the case in the wake of the 1987 stock-market crash, and trade data were manipulated late that year and early in 1988, in conjunction with massive central bank intervention, as part of an effort to stabilize the U.S. dollar. I mention this only as a caution that unusual government actions and event-driven data manipulations are possible in extraordinary circumstances. Most political manipulation of economic data has been systematic, with the introduction of new methodologies and related reporting biases over time. There have event-driven manipulations other than the 1987/1988 trade data that have been discussed in the Primer Series on our Web site.

Reporting of the April Labor Environment. Payroll Survey. The Bureau of Labor Statistics (BLS) reported a statistically-significant, seasonally-adjusted jobs gain of 290,000 (up by 411,000 net of revisions) +/- 129,000 (95% confidence interval) for April 2010, following a revised 230,000 (previously 162,000) jobs gain in March. 

Net of the temporary hiring of census workers, which will reverse out fully in the second half of the year, the April payroll gain was a statistically-significant 224,000 gain. Purportedly, census hiring will hit nearly 600,000 by the end of May. With 154,000 in place as of April, presumably roughly 450,000 census hires could be added in the month ahead. Based on employment patterns for the 2000 census, nearly all such gains should reverse out of the data by the end of September, with June payrolls reflecting the first outright contraction in the reversal of current hiring.

From peak-to-trough (the peak month was December 2007; January 2010 is the likely short-lived trough of the current cycle), payroll employment has declined by a seasonally-adjusted 8,349,000 jobs, or 6.1%.

The pace of reported monthly change has turned positive versus year-ago comparisons of sharp month-to-month declines. The year-to-year contraction (unadjusted) in total nonfarm payrolls narrowed accordingly to 1.0% in April versus a 1.7% annual contraction in March, and narrowed from the 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, which remains minimal, so far, on a year-to-year basis.   

 

 

Birth-Death/Bias Factor Adjustment.  As mentioned in the opening comments, unusual activity in the April 2010 birth-death adjustment added 62,000 more jobs than in April 2009, a pattern contrary to what would be suggested by recent reporting difficulties that have understated declines in payroll employment. The Birth-Death Model biases tend to overstate payroll employment levels — to understate employment declines — during recessions. These 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 had been 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 230,000 phantom jobs per month at present. That now could be roughly 300,000, given the unusual April data. Such misreporting, however, will not be corrected 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 was scaled back — averaging at present roughly an extra 33,000 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 230,000 jobs, plus.

That said, the unadjusted April 2010 bias was a monthly addition of 188,000 jobs, versus an addition of 126,000 jobs in April 2009, and against a monthly addition of 81,000 jobs in March 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 April of 550,000, versus an estimated March gain of 264,000.

The April 2010 seasonally-adjusted U.3 unemployment rate was reported at 9.86% +/- 0.23% (95% confidence interval). The 0.11% monthly gain versus March’s estimate of 9.75%, however, was statistically insignificant. Unadjusted U.3 was reported at 9.5% in April, down from 10.2% in March. Recently distorted seasonal factors that tended to understate the unemployment rate may be playing some catch-up. 

If all the temporary census hiring were of people who previously were unemployed, then the U.3 unemployment rate net of census would just round up to 10.0% instead of 9.9%. Yet a number of the census hires likely already were counted previously, as employed on a part-time basis, which means the headline U.3 rate, net of census impact probably still would have rounded to 9.9%.

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 recent seasonal issues, and are even less impacted by census issues, with their non-U.3 components. April U.6 unemployment rose to an adjusted 17.1% (eased to 16.6% unadjusted) from 16.9% (17.5% unadjusted) in March.

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 22.0% in April from 21.7% in March. See the Alternate Data tab for a graph and more detail.

As discussed in general, previously, while 22.0% 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%.

Signal Continues to Intensify for Renewed Economic Downturn. As discussed in recent Commentaries (see Commentary No. 290, for example), declining year-to-year change in real (inflation-adjusted) M3 signals a pending economic downturn or pending intensification of an existing economic contraction. The following updated graph reflects both the annual payroll change and the approximate annual real contraction in the SGS Ongoing-M3 Estimate as of April 2010. The M3 plot is shifted forward on the time scale by six months so as to show its leading relationship to payrolls. The April real M3 estimate is based on approximations of 4.8% annual nominal M3 contraction and 2.1% annual CPI-U, for a total 6.9% contraction, versus a 5.0% contraction in March. Assuming the April estimate holds, such would be a new record annual decline in the modern reporting of real M3. A formal preliminary estimate for the SGS Ongoing M3 measure for April will be published over this weekend.

 

 

As the deepening credit contraction continues to squeeze personal and business consumption, most major economic series should begin to soften "unexpectedly" in upcoming reports and in economic releases of the next several months.

Week Ahead. Given the underlying reality of a weaker economy (or 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.

U.S. Trade Balance (March 2010).  The March trade deficit is due for release on Wednesday, May 12th. Any large swing in the monthly deficit would have implications for the first revision to estimated first-quarter GDP growth. Reporting risk likely will favor a worse-than-expected deficit, which would put some downside pressure on the May 27th GDP revision.

Retail Sales (April 2010). The April retail sales series is due for release on Friday, May 14th, and the recovery-now apologists already are suggesting that March and April retail sales should be added together for purposes of analysis, because an early Easter stole business from April and helped to spike March data. Of course, the Census Bureau’s seasonal adjustments are supposed to offset the impact of such factors.  While weakness in the April numbers likely would include some reversal in recent poor-quality seasonal adjustments, it also should reflect early signs of a renewed downturn in economic activity. My bet would be for a weaker-than-expected result, with a fair shot at negative monthly and annual changes, net of inflation.    

Industrial Production (April 2010).  The April index of industrial production is due for release on Friday, May 14th. Possible catch-up in bad-quality seasonal adjustments and renewed slowing in economic activity place downside risk on the reporting this series versus whatever will be the consensus outlook.