by Calculated Risk on 2/04/2011 12:38:00 PM

FAQ: How can the unemployment rate fall sharply if the economy is adding so few jobs, especially since the population is growing?

This data comes from two separate surveys. The unemployment rate comes from the Current Population Survey (CPS: commonly called the household survey), a monthly survey of about 60,000 households. The payroll jobs number comes from Current Employment Statistics (CES: establishment survey), a sample of approximately “140,000 businesses and government agencies representing approximately 410,000 worksites”.

These are very different surveys: the CPS gives the total number of employed (and unemployed including the alternative measures), and the CES gives the total number of positions (excluding some categories like the self-employed, and a person working two jobs counts as two positions).

A couple of key concepts (from the BLS):

The CES employment series are estimates of nonfarm wage and salary jobs, not an estimate of employed persons; an individual with two jobs is counted twice by the payroll survey. The CES employment series excludes employees in agriculture and private households and the self-employed.

And the CPS:

The CPS estimate of employment is for the total number of employed persons. Included are categories of workers that are not covered by the Current Employment Statistics (CES) survey: self-employed persons, private household workers, agriculture workers, unpaid family workers, and workers on leave without pay during the reference period. Multiple jobholders are counted once in the estimate of total employed.

Unemployed persons include those who did not have a job during the reference week, had actively looked for work in the prior 4 weeks, and were available for work. Actively looking for work includes activities such as contacting a possible employer, contacting an employment agency or employment center, having a job interview, sending out resumes, filling out job applications, placing or answering job advertisements, and checking union or professional registers.

In January the headline CES number showed a gain of 36,000 non-farm jobs (by the definitions above). The CPS showed an increase of 117,000 employed people.

These two surveys are almost always different, and both are useful for understanding the employment situation.

Q: But the unemployment rate fell sharply even though the CPS only showed an increase of 117,000 employed people. How can that be?

The unemployment rate declined to 9.0% in January from 9.4% in December. The unemployment rate comes from directly from the CPS survey, but we can also think of it in terms of change in the labor force, and changes in the number of unemployed people. The unemployment rate is a ratio, with the numerator the number of unemployed, and the denominator the Civilian Labor Force - so the following changes lowered the unemployment rate to 9.0%.

The CPS also showed a decline in the Civilian Labor Force Level by 504,000. Some of this decline was due to a lower participation rate, and some of this decline was due a lower estimate of the Civilian noninstitutional population. In reality the working age population probably increased in January, but the updated population estimate showed a decrease of 185,000 people in the month.

The BLS provides some estimates with and without the change in population control (see Table C. at bottom of the release). Without the change in population control, the CPS would have shown an increase of 589,000 employed people. Also, without the change in population control, the number of unemployed would have fallen 590,000 (U-3). With the update population estimate, the number of unemployed declined 622,000.

So without the change in the population control - the change can be confusing - the CPS showed a surge in employment and a sharp decline in the unemployed, and that is the reason the unemployment rate declined sharply.

If you want more details, see Monthly Employment Situation Report: Quick Guide to Methods and Measurement Issues

Although the CPS showed the labor force declined in January, over time the labor force will continue to grow - probably around 1.5 to 2.0 million people per year on average, and the CES will probably need to show the addition of around 125,000 jobs per month just to keep the unemployment rate steady (estimates vary of this number).

Also weather usually has a bigger impact on the CES (establishment survey) than the CPS (household survey). We saw this last February when the CES showed a decline in payroll jobs and CPS showed an increase in the number employed and the unemployment rate held steady. Here is the archived February 2010 release. In the following month, March of 2010, the CES showed a relatively large increase in payroll jobs ex-Census (considering the weak labor market), and it was best to average the two reports together.

If the weak payroll report in January was due to the impact of weather we should expect a boost in the February payroll report and average the two together. If the underlying trend is around 150,000 payroll jobs per month, we'd expect to see 300,000 additional payroll jobs when we combine the January and February payroll reports next month.

So remember the jobs and unemployment rate come from two different surveys and they are different measurements of the employment situation (one for positions, the other for people). Some months the numbers may not seem to make sense (few payroll jobs and a sharp decline in the unemployment rate), but over time the numbers will work out.

Here are the earlier employment posts (with graphs):
• January Employment Report: 36,000 Jobs, 9.0% Unemployment Rate
• Employment Summary and Part Time Workers, Unemployed over 26 Weeks
• Employment Graph Gallery

by Calculated Risk on 2/04/2011 10:13:00 AM

Here are a few more graphs based on the employment report ...

Percent Job Losses During Recessions

Click on graph for larger image.

This graph shows the job losses from the start of the employment recession, in percentage terms - this time aligned at maximum job losses.

In the previous post, the graph showed the job losses aligned at the start of the recession.

In terms of lost payroll jobs, the 2007 recession is by far the worst since WWII, and the "recovery" for payroll jobs is one of the slowest.

Part Time for Economic Reasons

From the BLS report:

The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) declined from 8.9 to 8.4 million in January. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.

The number of workers only able to find part time jobs (or have had their hours cut for economic reasons) declined to 8.407 million in January.

These workers are included in the alternate measure of labor underutilization (U-6) that declined sharply to 16.1% in January from 16.7% in December. Still very high, but improving.

Unemployed over 26 Weeks

This graph shows the number of workers unemployed for 27 weeks or more.

According to the BLS, there are 6.21 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 6.44 million in December. This is still very high.

Summary

This was a decent report with two obvious exceptions: the few payroll jobs added, and the slight decline in the average workweek - both potentially weather related.

The best news was the decline in the unemployment rate to 9.0% from 9.4% in December. However this was partially because the participation rate declined to 64.2% - a new cycle low, and the lowest level since the early '80s. Note: This is the percentage of the working age population in the labor force (here is the graph in the galleries of the participation rate). The participation rate has now fallen 2 percentage points during the recession - a huge decline.

The 36,000 payroll jobs added was far below expectations of 150,000 jobs, however this was probably impacted by bad weather during the survey reference period. If so, there should be a strong bounce back in the February report.

The decreases for the long term unemployed, and for the number of part time workers for economic reasons, are good news - although both levels are still very high. The average workweek declined slightly to 34.2 hours (possibly weather related), and average hourly earnings ticked up 8 cents.

If we blame it on the weather, this was a solid report. And we will know about payrolls in February.

• Earlier Employment post: January Employment Report: 36,000 Jobs, 9.0% Unemployment Rate

by Calculated Risk on 2/04/2011 08:30:00 AM

From the BLS:

The unemployment rate fell by 0.4 percentage point to 9.0 percent in
January, while nonfarm payroll employment changed little (+36,000),
the U.S. Bureau of Labor Statistics reported today.

And on the benchmark revision:

The total nonfarm employment level for March 2010 was revised downward by 378,000 ... The previously published level for December 2010 was revised downward by 452,000.

The following graph shows the employment population ratio, the participation rate, and the unemployment rate.

Click on graph for larger image.

The unemployment rate decreased to 9.0% (red line).

The Labor Force Participation Rate declined to 64.2% in January (blue line). This is the lowest level since the early '80s. (This is the percentage of the working age population in the labor force. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years.)

The Employment-Population ratio increased to 58.4% in January (black line).

The second graph shows the job losses from the start of the employment recession, in percentage terms from the start of the recession. The dotted line is ex-Census hiring.

For the current employment recession, the graph starts in December 2007, and this recession is by far the worst recession since WWII in percentage terms, and 2nd worst in terms of the unemployment rate (only the early '80s recession with a peak of 10.8 percent was worse).

This was significantly below expectations for payroll jobs. Weather may have been a factor. I'll have much more soon ...

by Calculated Risk on 2/03/2011 10:10:00 PM

Note: Earlier I posted some thoughts on employment: Employment Situation: A Lighter Shade of Gray

From Floyd Norris at the NY Times: From 1983, Hope for Jobs in 2011

In January 1983 ... the unemployment rate fell to 10.4 percent from 10.8 percent. It was the first such decline in five years, but few thought it significant.

“The A.F.L.-C.I.O.,” The Washington Post reported, “said yesterday that there was no real improvement in unemployment last month because the decline was caused primarily by people dropping out of the labor force, rather than finding jobs.”

... the rate at the end of 1983 turned out to be 8.3 percent.

Norris points out some differences and similarities between now and then, and he is hopeful something similar will happen with unemployment this year. But I think he is too optimistic.

First, in 1983 the participation rate was all of 0.3 percentage points below the recent peak. Now it is 1.9 percentage points lower than the recent peak - suggesting some bounce back is more likely (keeping the unemployment rate elevated).

But a far more important difference between now and then is ... housing. There were just over 1 million housing starts in 1982, and starts picked up sharply in 1983 rising to over 1.7 million!

I've been pounding the table arguing that housing would add to both GDP and employment growth in 2011 for the first time since 2005. But does anyone think housing starts will increase by 650 thousand units in 2011 (more than doubling the just under 600 thousand units in 2010)?

Not. Gonna. Happen. Not with the huge overhang of existing vacant housing units (the overhang is declining, but we still have a ways to go). Housing was a key engine of job growth in 1983, but housing will have less of an impact in 2011.

I hope Mr. Norris is correct and the unemployment rate drops sharply in 2011, but my guess is the decline will be more sluggish this year than in 1983.

by Calculated Risk on 2/03/2011 08:19:00 PM

From the NY Times: White House, Egypt Discusses Plan for Mubarak’s Exit

The Obama administration is discussing with Egyptian officials a proposal for President Hosni Mubarak to resign immediately, turning over power to a transitional government headed by Vice President Omar Suleiman with the support of the Egyptian military, administration officials and Arab diplomats said Thursday.

Here is the al Jazeera English site, and the live blog for Feb 4th (currently unavailable).

by Calculated Risk on 2/03/2011 06:15:00 PM

With the key European meeting tomorrow, here is a look at European bond spreads from the Atlanta Fed weekly Financial Highlights released today (graph as of Feb 1st):

Click on graph for larger image in new window.

From the Atlanta Fed:

While there has been some improvement since the start of the year, most peripheral European bond spreads (over German bonds) continue to be elevated, particularly those of Greece, Ireland, and Portugal.

Since the start of the year, the 10-year Greece-to-German bond spread has narrowed by 183 basis points (bps), through February 1. Similarly, the spread for Ireland is 41 bps lower, 54 bps lower for Spain, and down 42 bps for Italy.

Portugal’s spread, however, is essentially unchanged over the period.

The bond yields are up slightly today. The Portugal 10 year is at 6.99%, the Ireland 10-year bond yield is at 8.86%, and the Greece 10-year bond yield has fallen to 10.9%.

From MarketWatch: Merkel: EU to discuss competitiveness on Friday

"We're going to start the talks, and then between now and the March summit, we will firm up the details," [German Chancellor Angela Merkel] said ... The meeting is expected to see plans to expand the [EFSF], with Germany pushing for efforts to boost competitiveness and fiscal discipline

by Calculated Risk on 2/03/2011 02:36:00 PM

The numbers are grim: almost 15 million Americans are unemployed, another 9 million are working part time for economic reasons, and about 4 million more have left the labor force since the start of the recession (we can see this in the dramatic drop in the labor force participation rate). Of those unemployed, 6.4 million have been unemployed for six months or more.

And the situation is also bleak for many of those who have jobs. A recent report showed most of the employment growth has been in low-to-mid wage industries (more skewed than in previous recoveries). And real earnings for most Americans have been under pressure for some time.

Against that backdrop, the recent spate of good employment news might seem almost insignificant, but it is a start.

Tomorrow the BLS will release the January Employment Situation Summary at 8:30 AM ET. The consensus is for an increase of 150,000 payroll jobs in January, and for the unemployment rate to increase slightly to 9.5% (from 9.4% in December).

That would be an improvement – the U.S. economy only added about 95,000 jobs per month in 2010 - however 150,000 additional payroll jobs is still pretty small compared to the number of unemployed. And that is barely enough to keep up with the growth of the working age population.

So while news reports might suggest “improvement”, many of the unemployed and marginally employed will not see it, at least not yet, and probably not for some time.

Here is a look at a few of the recent employment related reports:

• ADP reported Private Employment increased by 187,000 in January, and has averaged 217,000 over the last two months.

• Weekly initial unemployment claims were down significantly over the last few months. The graph is here. The average over the last 5 weeks was 425,000 initial claims per week, down sharply from the October the average of 456,000.

• The ISM indexes showed significantly stronger employment growth. The ISM manufacturing manufacturing Employment Index registered 61.7 in January, 2.8 percentage points higher than the 58.9 percent reported in December. The ISM Non-manufacturing employment index showed faster expansion in December at 54.5%, up from 52.6% in December. (graph is here)

• All of the Regional Fed manufacturing surveys reported employment expansion.

Also Madeline Schnapp, Director, Macroeconomic Research at TrimTabs Investment Research sent me the following note:

Our withholding tax model for jobs was crippled this past month by the withholding tax changes (2% payroll tax deduction). We did come up with a "guestimate" for January job growth of 175,000 to 215,000 new jobs using data from the last week of January (poor substitute) and all of the other jobs related indicators we track. Those indicators are very bullish. In sum, from a qualitative (not quantitative) viewpoint, we expect the job growth reported by the BLS to surprise on the upside.

In addition to the above indicators, Ms. Schnapp noted:

• The TrimTabs Online Job Postings Index rose 4.5% in January, the biggest gain since October 2010.

• Commercial and industrial loan growth accelerated to 1.0% in the past month. Stronger commercial and industrial loan growth often accompanies a pickup in job growth.

• The Federal Reserve’s Senior Loan Officer Opinion Survey reported that demand for business loans picked up in Q4 2010, and demand for commercial and industrial loans was the strongest since 2006.

• The Federal Reserve’s “Beige Book” reported that labor markets improved in most districts. Temporary staffing firms in six of 12 districts gave positive reports. Eight of 12 districts reported that their business contacts planned to hold hiring steady or increase hiring in 2011.

• Personal consumption expenditures rose 4.4% in Q4 2010, the largest increase since Q1 2006. Meanwhile, final sales increased 7.1%, the strongest growth since 1984.

We are a long way from blue skies, but maybe we are seeing a lighter shade of gray.

A few notes:
1) The BLS will release the annual benchmark revision tomorrow. Last October the BLS released the preliminary annual benchmark revision of minus 366,000 payroll jobs as of March 2010. Usually the preliminary estimate is pretty close to the final benchmark estimate.
2) Some people are concerned about the impact of the January snow storms on the employment report. If there is a significant impact, the BLS will mention it in the release.
3) My forecast is for something close to 200 thousand private sector jobs on average per month this year.

by Calculated Risk on 2/03/2011 12:30:00 PM

Bernanke says the economy is improving, but QE2 will remain ...

From Fed Chairman Ben Bernanke: The Economic Outlook and Macroeconomic Policies

[W]e have seen increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold. ... [A]lthough economic growth will probably increase this year, we expect the unemployment rate to remain stubbornly above, and inflation to remain persistently below, the levels that Federal Reserve policymakers have judged to be consistent over the longer term with our mandate from the Congress to foster maximum employment and price stability. Under such conditions, the Federal Reserve would typically ease monetary policy by reducing the target for its short-term policy interest rate, the federal funds rate. However, the target range for the funds rate has been near zero since December 2008, and the Federal Reserve has indicated that economic conditions are likely to warrant an exceptionally low target rate for an extended period. As a result, for the past two years we have been using alternative tools to provide additional monetary accommodation.

Unemployment is too high. Inflation (core measures) still too low. So QE2 will continue ...

And on inflation:

On the inflation front, we have recently seen significant increases in some highly visible prices, notably for gasoline. Indeed, prices of many commodities have risen lately, largely as a result of the very strong demand from fast-growing emerging market economies, coupled, in some cases, with constraints on supply. Nevertheless, overall inflation remains quite low: Over the 12 months ending in December, prices for all the goods and services purchased by households increased by only 1.2 percent, down from 2.4 percent over the prior 12 months. To assess underlying trends in inflation, economists also follow several alternative measures of inflation; one such measure is so-called core inflation, which excludes the more volatile food and energy components and therefore can be a better predictor of where overall inflation is headed. Core inflation was only 0.7 percent in 2010, compared with around 2-1/2 percent in 2007, the year before the recession began. Wage growth has slowed as well, with average hourly earnings increasing only 1.8 percent last year. These downward trends in wage and price inflation are not surprising, given the substantial slack in the economy.

by Calculated Risk on 2/03/2011 10:00:00 AM

The January ISM Non-manufacturing index was at 59.4%, up from 57.1% in December. The employment index showed faster expansion in December at 54.5%, up from 52.6% in December. Note: Above 50 indicates expansion, below 50 contraction.

Click on graph for larger image in graph gallery.

This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.

From the Institute for Supply Management: January 2011 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector grew in January for the 14th consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

The report was issued today by Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management™ Non-Manufacturing Business Survey Committee. "The NMI (Non-Manufacturing Index) registered 59.4 percent in January, 2.3 percentage points higher than the seasonally adjusted 57.1 percent registered in December (the seasonal adjustment did not change the reading that was originally reported), and indicating continued growth in the non-manufacturing sector. The Non-Manufacturing Business Activity Index increased 1.7 percentage points to 64.6 percent, reflecting growth for the 18th consecutive month and at a faster rate than in December. The New Orders Index increased 3.5 percentage points to 64.9 percent, and the Employment Index increased 1.9 percentage points to 54.5 percent, indicating growth in employment for the fifth consecutive month and at a faster rate. The Prices Index increased 2.6 percentage points to 72.1 percent, indicating that prices increased at a faster rate in January. According to the NMI, 13 non-manufacturing industries reported growth in January. Respondents' comments are mostly positive about business conditions; however, they still remain cautious about the sustainability."
emphasis added

This was a solid report and above expectations of 57.0%.

by Calculated Risk on 2/03/2011 08:30:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending Jan. 29, the advance figure for seasonally adjusted initial claims was 415,000, a decrease of 42,000 from the previous week's revised figure of 457,000. The 4-week moving average was 430,500, an increase of 1,000 from the previous week's revised average of 429,500.

Click on graph for larger image in new window.

This graph shows the 4-week moving average of weekly claims for the last 10 years. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased this week by 1,000 to 430,500.

This was slightly lower than consensus expectations. The decline in the four week average over the last few months has been good news.