Jobs Data Struck Close to Consensus. The June payroll data were fortuitously close enough to consensus outlook so as not to roil the financial markets. I was wrong in my assessment of likely reporting, where both the seasonally-adjusted June payroll gain of 100,000 — net of census layoffs — and the decline in U.3 unemployment rate to 9.5% were counter in direction to my expectations. Nonetheless, neither the payroll reporting nor the unemployment rate changed enough to be statistically meaningful. The same also would have been true, if my expectations of weaker reporting had been met. Irrespective of today’s report, signs of a renewed or intensifying economic contraction should continue to mount.

The labor numbers are the first major economic report of the month. I look for most other upcoming statistical reports for June and July either to disappoint consensus economic forecasts on the downside, or for economic expectations to soften sharply in advance of the reporting. The underlying structural problems for the economy have not changed, and the continuing and underlying economic troubles will be caught up soon enough in the labor data. The results just were not definitive today.

A full review of current economic conditions and the broad outlook on the economy and financial system and markets will follow in next Friday’s (July 9th) regular Commentary.

Reporting of the June Labor Environment. Payroll Survey. The Bureau of Labor Statistics (BLS) reported a statistically-insignificant, seasonally-adjusted jobs loss of 125,000 (down by 100,000 net of revisions) +/- 129,000 (95% confidence interval) for June 2010. Net of the included layoff of 225,000 intermittent and temporary census hires, June payrolls gained a statistically-insignificant 100,000 (a gain of 125,000 net of prior-period revisions). Thanks to a reported jump in other federal government hiring, private sector payrolls rose by 83,000 in the month. Against June’s total jobs loss of 125,000, a jobs gain net of census impact of 100,000, and a jobs gain of 83,000 in the private sector, May showed a revised monthly total jobs gain of 433,000 (previously 431,000), a jobs gain net of census impact of 22,000 (previously 20,000), and a jobs gain in the private sector of 33,000 (previously a 41,000 gain).

Based on the patterns of hiring and firing temporary workers for the 2000 census, census layoffs from the 2010 census will continue to have major negative impact on reported payroll changes for the months of July through September.

From peak-to-trough (the peak month was December 2007; December 2009 is the likely short-lived trough of the current cycle), payroll employment declined by a seasonally-adjusted 8,363,000 jobs, or 6.1%.

The pace of reported monthly change has turned relatively less negative versus year-ago comparisons of sharp month-to-month declines. The year-to-year contraction in total nonfarm payrolls narrowed to 0.05% (a contraction of 0.30% net of census hires) in June, from May’s revised annual contraction of 0.36% (previously 0.37%) in aggregate and a revised 0.74% (previously 0.75%) contraction net of census hires. 

The current annual declines have narrowed from the post-World War II record 4.96% 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 7.59% annual contraction in September 1945. Disallowing the post-war shutdown as a normal business cycle, the current annual decline remains the worst since the Great Depression. 

The long-term graph of year-to-year payroll change reflects the numbers as reported, with no adjustment for census hiring variations. The second graph, however, shows the year-to-year detail both with and without the census hires.   

 

 

Birth-Death/Bias Factor Adjustment.Where the BLS cannot measure the impact of jobs loss and jobs creation from employers starting up or going out of business, on a timely basis (within five years), such information is estimated by the Birth-Death Model. Unusual birth-death activity continued in June 2010, with the monthly birth-death adjustment adding 14,000 more jobs than it did in June 2009, a pattern contrary to what would be suggested by recent BLS reporting difficulties that understated declines in payroll employment.

Based now on the "assumption" of economic recovery, the bias factors used in the last three months of payroll reporting have been 23.6% ahead of what they were reset to after the most recent and disastrous benchmark revision. Positive assumptions — commonly built into government statistical reporting and modeling — can become self-fulfilling prophesies, with "stronger" economic data being reported as a result of happy guesstimates.

Historically, the Birth-Death Model biases have tended to overstate payroll employment levels — to understate employment declines — during recessions. These flaws were confirmed by the nature of the BLS’s massive downside benchmark revision published with the January 2010 jobs report, where the BLS had indicated that underlying assumptions to the Birth-Death Model were missing significant jobs losses due to business failures that the BLS could not measure. 

Although the upside bias had been scaled down some from the year before as a result of the reporting errors, the Birth-Death Model survives and remains a major distorting factor in monthly payroll reporting. 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. 

Further, presumed additional "surplus" jobs, created by start-up firms, get added on to the payroll estimates each month as a special add-factor. Although these add-factors were revised lower in the most-recent benchmark — the only portion of the model that was scaled back — to roughly an extra 36,000 seasonally-adjusted jobs per month, such now seems to have been upped to about 50,000 per month. I estimate this monthly bias should be negative by 200,000 or so, on average. Since it is not, the BLS continues regularly to overestimate monthly growth in payroll employment by roughly 250,000 jobs. Such misreporting, however, will not be corrected until the next benchmark revision is published in February 2011, well after the November elections.

That said, the unadjusted June 2010 bias was a monthly addition of 147,000 jobs, versus an addition of 133,000 jobs in June 2009, and against a monthly addition of 215,000 jobs in May 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 contraction of 301,000 in June, following a reported decline of 35,000 in May, irrespective of census jobs impact.  As with last month’s data, the series appears to be suffering major distortions from inappropriate seasonal-adjustments made to the changes in temporary census worker employment. 

The problem remains that since a number of the part-time census workers already would be counted as employed due to other part-time or full-time employment, accurately quantifying the impact of census employment changes on unemployment is not possible.

Where I fully expected that some portion of the census layoffs would have at least pushed the unemployment rate minimally higher, such did not happen. Nonetheless, sharp upside movements in the unemployment rate in the next several months should be seen as these distortions are reversed, and as the intensifying economic downturn takes a firmer grip on the labor data.

The June 2010 seasonally-adjusted U.3 unemployment rate was reported at 9.51% +/- 0.23% (95% confidence interval). The 0.19 percentage-point decline versus May’s U.3 estimate of 9.70%, however, was statistically insignificant. Not seasonally adjusted, June’s U.3 unemployment rate rose to 9.6% from 9.3% in May. 

The broader unemployment measures also appear to have suffered distortions from the ongoing census employment gyrations. June U.6 unemployment eased to an adjusted 16.5% (rose to 16.7% unadjusted) from 16.6% (16.1% unadjusted) in May. The shallower decline in the adjusted (sharper increase in the unadjusted) U.6 versus U.3 unemployment rate suggests a growing number of short-term discouraged workers. Nonetheless, with the census distortions in play, not too much should be read from the current numbers.

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 my estimate of 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 — notched lower to about 21.6% in June from 21.7% in May. While the some of the heavy jobs loss of a year ago is moving to the long-term discouraged workers category, the SGS estimate is built on top of the official U.6 reporting and tends to follow its relative monthly movements. See the Alternate Data tab for a graph and more detail.

As discussed in general, previously, while 21.6% 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 for Intensification of the Economic Downturn. As discussed in recent Commentaries (see Commentary No. 301, 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, with contracting broad liquidity invariably constraining broad economic activity. The signal is generated when real M3 first turns negative year-to-year, which occurred in December 2009 in the current economic cycle. The downside shift in business activity usually follows within six to nine months. 

The following updated graph plots annual real M3 growth versus periods of recession formally recognized by the National Bureau of Economic Research (NBER). It includes approximate annual real contraction in the SGS Ongoing-M3 Estimate as of June 2010. The June M3 estimate used here is an annual contraction of roughly 7.9% versus a 7.9% contraction in May. Such reflects a likely softer June annual inflation rate offsetting some further deterioration in the nominal annual M3 decline. Details will be discussed in the next Commentary (July 9th), which will review the broad outlook and the money supply circumstance. The formal preliminary estimate for the SGS Ongoing M3 Measure for July will be posted the weekend of July 10th on the Alternate Data page for M3.

At present, the pace of annual contraction in nominal June M3 is on track to hit 6.1% versus 5.9% in May, a more-modest relative pace of deterioration than has been seen in recent months. This reflects annual comparison against a pace of slowing growth in the year-ago period and is qualified by the unusually choppy nature of recent weekly reporting in the major M3 components.