Tuesday, November 10, 2009

Employment and the Seasonal Adjustment

by Bill McBride on 11/10/2009 12:19:00 AM

Floyd Norris at the NY Times asks: Did Unemployment Really Rise?

The economic reactions over the weekend to Friday’s employment report all started from the assumption that things grew much worse in October. The unemployment rate leaped to 10.2 percent from 9.8 percent. Another 190,000 jobs vanished.

Actually, none of that happened.

In reality, the government report says unemployment rates remained steady at 9.5 percent. And the number of jobs actually rose, by 80,000. ...

The adjustments are for seasonality. ... All this may be very reasonable, and there is no way I can think of to test whether the seasonal adjustments are reliable. But I suspect seasonal factors are less important this year, when the economy may be changing directions, than they normally are.
I'm not sure where the 80,000 number came from - the not seasonally adjusted (NSA) payroll employment increased by 641,000 in October - but the BLS did report a 9.5% NSA unemployment rate.

However there is a strong and consistent seasonal pattern for employment, and I think the seasonal adjusted numbers are the ones to use. I wrote about this earlier this year (excerpt with an updated graph):
What if I wrote that U.S. payroll employment increased by 383 thousand jobs in May 2009 following an increase of 259 thousand jobs in April 2009?

Some readers would suspect CR had been captured by aliens or had visited crazytown.

But, in fact, those numbers are exactly what the BLS reported as the actual change in payroll employment in April and May. The economy added 643 thousand jobs over those two months. However no one reports those numbers because there is a strong seasonal pattern to employment.

Even in the best of years, 2.5 to 3.0 million people lose their jobs in January. It happens every year for a number of reasons such as retail cutting back on holiday hires. And just about every July the economy loses over 1 million jobs for seasonal reasons too.

The following graph shows this seasonal pattern:

Payroll Employment Seasonal Adjustment Click on graph for larger image in new window.

The blue line is the seasonally adjusted (SA) change in net jobs as reported by the BLS, and the red columns are the actual not seasonally adjusted (NSA) data.

No one reports the NSA data because the swings are so wild and the pattern very consistent. Unless you follow the data closely, the NSA numbers are meaningless.
There may be problems with the BLS numbers - as an example the birth/death model has consistently overestimated new job creation during the current employment recession, possibly because small businesses have been impacted more than larger companies. But the model used by the BLS for seasonal adjustments is very good, and the SA number is still the one to use.