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Tuesday, October 30, 2012

October’s Unemployment Rate May Fall Below 7.8%

Last month, the government surprised almost everyone by reporting that the seasonally adjusted unemployment rate fell to 7.8% in September. Now, Gallup Daily tracking data suggest the government could report another decline in October, as opposed to the consensus forecast for a slight increase to 7.9%. Gallup’s adjusted unemployment rate fell to 7.5% in October based on more than 30,000 monthly interviews completed through 30 days ending Oct. 28. If the government’s numbers follow a similar pattern, the BLS will report a 7.4% unemployment rate for October.

One reason the unemployment rate might show another decline has to do with a relatively recent surge in the hiring of part-time workers. The percentage of part-time workers increased to 19.2% of the workforce in October from 18.5% in September and 18.0% in August. This makes sense in the context of highly uncertain employers adding part-time help instead of hiring full time positions. However, it is not necessarily an indication of an improving U.S. economy.

Another reason may have to do with the composition of the recent GDP estimate. It appears that GDP for the third quarter may have benefited from surprisingly strong defense and other government spending. It seems reasonable to assume that this added spending may be translating into some additional jobs in October. Further, Gallup’s data suggest the workforce may not be growing in October -- maintaining today’s surprisingly low participation rate.

It may turn out that the government’s seasonally unadjusted unemployment rate will continue to decline when reported this Friday. Although a plummeting unemployment rate is hard to reconcile with an economy growing at 2% or less, not to mention Gallup’s declining job creation measure, it may be that the combination of a shrinking workforce and surge in part-time employees can make that happen over a period of months. Regardless, this does not mean that such a trend is a positive indicator of real economic performance, at least at this point in time.

Wednesday, October 17, 2012

Unemployment Rate Decline Is Misleading

Gallup’s new P2P (Payroll to Population) job market measurement shows essentially no improvement in the U.S. job market over the past four months and in early October. This stands in sharp contrast to Gallup’s unemployment data showing an October plunge in unemployment and implies that the unemployment rate is likely a misleading measure of real conditions in the nation’s labor market.

Why the big difference between the P2P and the unemployment rate? The P2P is a simple, straightforward measure of job market conditions that computes the number of Americans employed full time for an employer as a percentage of the population. As a result, it avoids the many adjustments and estimates involved in calculating the government’s unemployment rate.

The P2P is also devoid of the distortions created by the shrinking labor force and the increased use of part-time employees. For example, the BLS reported an unadjusted labor force participation rate of 63.6% in September -- down from 64.3% in July -- and enough of a decline to explain the drop in the unemployment rate over the past two months. In this regard, it is worth noting that a year-over-year comparison shows the labor force participation rate plunging during the past several years, and thereby artificially reducing the unemployment rate.

In addition, the P2P is not affected by the hiring of part-time workers. Gallup data show a 0.6% drop in the unadjusted unemployment rate at mid-October. At the same time, the number of part-time workers looking for full-time work increased 0.4%, most likely explaining two-thirds of the drop in the unemployment rate. The remainder of the drop in the unemployment rate may be related to an increase in the number of part-time workers who are not seeking full-time work. A declining unemployment rate based on uncertain employers adding part-time help and a shrinking labor force tends to be misleading -- it is not a sign of a healthy job market or economy, but just the opposite. 

Three in Four Democrats Say Economy Is “Getting Better”

In behavioral economics, as well as in politics, economic perceptions are often more important than economic reality. In this regard, improving economic confidence is likely good news politically for President Barack Obama. On the other hand, the political forces driving these increases suggest such confidence measures should be highly discounted as an economic indicator right now.

The percentage of Democrats saying the U.S. economy is “getting better” averaged 74% over the first two weeks of October. This is up from 59% who held this view in August and 70% in September. At the same time, 14% of Republicans said the economy is getting better over the first two weeks of October. This is the same as the 14% of Republicans who said so in August and September. Overall, the surge in economic confidence among Democrats has played a significant role in increasing the overall percentage of Americans saying the economy is getting better to 43% during the first two weeks of October.

The difference in economic perceptions of the future direction of economy between Democrats and Republicans stands at 60 percentage points in October, compared with 45 points in August and 20 points in October 2011. While Democrats have tended to be more positive than Republicans about prospects for the economy during Obama’s first term as president, that difference is at record proportions in September and October of 2012.

What appears to be happening is that an increasing number of Democrats are buying into former President Bill Clinton’s framing of the economy -- this might be loosely paraphrased as: Given the state of the economy when he took office, no one could have done better with the economy during Obama’s term, that the economy is headed in the right direction, and to stay the course. On the other hand, few Republicans see the economy getting better, instead seemingly adhering to the Romney view that this is the worst economic recovery since the 1930s.

Independents’ Views Are Most Important Politically and Economically

While the large differences in economic expectations between Democrats and Republicans cast doubt on the usefulness of economic confidence data as an economic indicator at this point in an election year, that is not necessarily the case with independents. Presumably, the economic perceptions of independents are largely unbiased consumers’ views of both the future direction of the economy and who is winning the economic argument politically.

In this regard, the percentage of independents saying the economy is getting better increased to 39% in the first two weeks of October. These most recent numbers match the highest percentage for independents' economic confidence in 2012 and correcting for the summer swoon in confidence. While independents are nowhere near as optimistic about the future direction of the economy as Democrats, they are considerably more so than Republicans. While substantially less than half of independents say the economy is getting better, September through October increases in confidence among independents provide Obama with a much better economic setting than was the case during the summer.

Wednesday, October 10, 2012

Shrinking Workforce Driving 7.8% Unemployment Rate

The decline in the unemployment rate to 7.8% in September from 8.3% in July was driven by a sharp decline in the U.S. workforce over these two months. The impact of the shrinking workforce on the unemployment rate seemed to be pretty well understood as far as the August decline was concerned -- but far fewer seem to recognize the same is true when applied to the two months combined. In turn, the role of the shrinking workforce in the plummeting unemployment rate is not good news for the U.S. economy -- in fact, it's just the opposite.

According to the BLS, the number of employed Americans increased by 207,000 jobs over the July to September period. At the same time, the number of unemployed workers fell by 1.66 million. The remainder of the decline in the number of employed Americans is due to a decline in the unadjusted workforce of 1.45 million. As a result, the unadjusted unemployment rate fell to 7.6% in September from 8.6% in July. As noted previously, after various seasonal adjustments, the adjusted unemployment rate fell to 7.8% in September from 8.3% in July.

Adding to the credibility of this two-month approach is its comparison to the employment survey. The number of new jobs reported by the household survey of 207,000 over these two months compares well with the 210,000 new jobs originally reported in the employment survey (256,000 after July revisions).

Most importantly, the role of the shrinking labor force in the declining unemployment rate suggests the results may not be a positive for the economy. If the workforce remained at July levels and those dropping out were looking for work, the unadjusted unemployment rate would be 8.4% in September -- not much different than the 8.6% of July. The adjusted unemployment rate would be 8.6%.  

Friday, October 5, 2012

Time to Replace the Unemployment Rate

This blog mentioned in mid-September that it was possible -- if unlikely, based on Gallup's survey data that include 30,000 interviews per month -- that September's seasonally adjusted unemployment rate could fall to 7.9%. Still, Friday's BLS report of a drop to 7.8% in the Household survey seemed to surprise everyone, as has been the case on many occasions this year.

The problem is that even though the Household survey tends to be very volatile, this decline seems to lack face-validity, particularly after the prior month's numbers. The consensus estimate was that the government would report that the unemployment rate was unchanged at 8.1% in September. GDP growth was 1.3% in the second quarter and seems to be no better this quarter. The government's Establishment survey shows there were 114,000 new jobs created in September -- very close to the consensus of 113,000 -- and not sufficient to lower the unemployment rate.

The obvious conclusion is that a new employment measure is needed. Gallup has proposed such a measure -- Payroll to Population (P2P) -- the number of Americans employed full-time for an employer as a percentage of the U.S. population. This is a much simpler measure that has none of the numerous adjustments made to the seasonally adjusted unemployment rate. The P2P deteriorated slightly to 45.1% in September from 45.3% in August, suggesting the real jobs situation was essentially unchanged last month.

Household Results Should Be Discounted

A quick comparison of the government's seasonally adjusted and unadjusted employment data seems hard to reconcile with the weak economy. For example, the government shows the number of employed workers increasing by 775,000 in September from August on an unadjusted basis. This surge in hiring seems surprisingly large given the current economy, not to mention the even larger adjusted increase of 873,000. Similarly, the number of unemployed declined by 954,000 in September on an unadjusted basis. This is reduced to a smaller adjusted decline of 456,000 -- but both numbers are also surprisingly large.

The Household data raise similar questions when averaged over time. Over the past two months, the unadjusted increase in the number of Americans employed has totaled 207,000 while the number of unemployed workers has declined by 1.66 million. The difference is made up by a decline of 1.45 million workers in the size of the workforce.

As a result, the unadjusted unemployment rate has plunged by one percentage point over the past two months to 7.6% from 8.6% -- an enormous decline given the weak economy.

Over the same period, the seasonally adjusted rate has fallen 0.5 points to 7.8% in September from 8.3% in July.

Focus Should Be on Payroll to Population 

The lack of face-validity of the government's unemployment numbers creates major problems, particularly during a presidential election year. The situation is worsened by the huge number of complex adjustments made to the data. Rather than debate whether something is wrong with the government's estimation process, it seems reasonable to look at other measures as an alternative.

Gallup's P2P is such an alternative. It is simple to calculate and thus, transparent to the public. It is based on 30,000 phone interviews a month. Most importantly, it provides insight into real job market conditions.

Thursday, October 4, 2012

Will Friday’s Unemployment Report Help Obama?

Given the results of last night’s presidential debate, the administration could use some good news in Friday’s unemployment report. A decline in the government's seasonally adjusted unemployment rate for September to 7.9% -- nearly matching its lowest level since President Barack Obama took office -- might be just what the president needs. While this seems unlikely based on Gallup's September polling both at mid-month and now for the month as a whole, it remains a distinct possibility.

The potential for such a surprise in the official unemployment rate for September supports Gallup’s argument that the best measure of the jobs situation in the U.S. and around the world is Payroll to Population (PTP). This measure has the major advantage of simplicity while simultaneously reflecting the economic strength of the nation. Gallup’s PTP measure is at 45.1% in September compared with 45.3% in August, meaning the U.S. real jobs situation was essentially unchanged in September.

Calculating the Unemployment Rate

Gallup's unadjusted unemployment rate fell to 7.9% in September -- down from 8.1% in August and the lowest monthly average since Gallup began measuring it in January 2010. Of course, part of the reason for this improvement has to do with temporary hiring for Halloween -- now a major sales event for the nation’s retailers -- and the Christmas holidays.

Last year, the government added 0.2 percentage points to September's unadjusted rate to account for this seasonal hiring of holiday employees. Applying that same 2011 seasonal adjustment to Gallup’s unadjusted unemployment rate produces an 8.1% adjusted rate for September 2012.

If the government's data show a 0.2-point decline in its unadjusted rate, as Gallup did, the BLS will report an unadjusted September rate of 8.0%. Adding a 0.2-point upward seasonal adjustment produces a seasonally adjusted unemployment rate of 8.2% for September.

Of course, the size of the workforce could play a big role in the government’s unemployment rate calculation, as it did in August. However, Gallup's monitoring of the unadjusted workforce participation rate -- the percentage of the workforce employed -- shows no change in September.

Gallup's monitoring of the unemployment situation suggests the odds seem pretty good that the government will report a seasonally adjusted unemployment rate of 8% or higher on Friday. The government’s numbers are based on a mid-month reference week for which Gallup found the same results as its monthly numbers for September. Gallup's results were close to the government's in August of this year and in September 2011. Further, it seems unlikely that the government will report another major drop in the size of the workforce after showing such a huge drop in August.

Still, ADP did show a slightly higher-than-consensus private-sector growth number Wednesday. Jobless claims fell substantially during the BLS reference week. Regardless, it is still possible that the government’s unadjusted decline in the unemployment rate will be larger than Gallup's, that its seasonal adjustment will be smaller for September, and/or that the government will show another decline in the size of the workforce. As a result, a 7.9% unemployment rate for September remains possible, if unlikely.

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