Welch Consulting Employment Index Rebounds in January

The Welch Consulting Employment Index is 94.9 for January 2013, up from 94.5 in December.  The employment index increased despite the increase in the U.S. unemployment rate because more people were participating in the labor force in January, as a fraction of the total population, compared to December.  An index value of 94.9 means that full-time equivalent employment (from the BLS household survey) is 5.1% below its level in the base year of 1997, after adjusting for both population growth and changes in the age distribution of the labor force.  The index has recovered from sharp declines in the summer of 2012 and is the same as it was in March 2012.  This means that full-time employment has kept pace with population growth over the past ten months.  Over the past five years the Welch Consulting Employment Index has fallen 6.2% (it was 101.2 in January 2008).

The Welch Consulting Employment Index, disaggregated by gender, is 92.8 for men and 97.7 for women.  Both the indices for men and women are up sharply slightly from December.  Over the past ten months the men’s index is up 0.3% while the women’s employment index is down 0.2%.  Over the past five years the men’s employment index is lower by 6.5% and the women’s index is lower by 5.7%.

 

Technical Note: Full-time equivalent employment equals full-time employment plus one half of part-time employment from the BLS household survey.  The Welch index adjusts for the changing age distribution of the population by fixing the age distribution of adults to the 1997 base year.  The Welch Index adjusts for population growth by fixing total population to its 1997 level.  Seasonal effects are removed in a regression framework using monthly indicator variables.

 

 

January Jobs and Seasonality

Earlier this week I expected the January jobs report to indicate that the economy “added” between 250,000 and 300,000 jobs.  My forecast was premised on BLS continued use of a much larger seasonal adjustment factor.  The BLS appears to be using a more conventional seasonal adjustment factor in 2013 than in 2011 and 2012.  This should mean fewer ups and downs in the jobs reports in 2013 due to seasonal noise.

The BLS seasonal adjustment procedure is a moving average process: seasonal factors change over time.  January is the weakest month of the year for jobs.  Therefore the seasonal factor for January inflates the payroll employment total in order to account for the anticipated drop in employment after the holidays.  The following chart shows how much the BLS seasonal factors have inflated employment in January from 2001 to 2013.  The lowest seasonal adjustment was +1.522% in 2009.  The ten-year average adjustment from 2001 to 2010 was 1.573%.

The BLS attributed none of the severity of the downturn in January 2009 to a large seasonal effect at the time.  As the previous chart indicates the BLS actually viewed January 2009 as the mildest January in a decade; that is why employment was adjusted up by only 1.522%, much less than in other years.  The steep employment decline in January 2009 has an echo in two to three years.  The BLS X-12 ARIMA model for seasonal adjustment incorporates the loss of 3.7 million jobs between December 2008 and January 2009 as evidence that the seasonal “January effect” in employment had increased.  Consequently the seasonal adjustments for January 2011 and 2012 were +1.66% and 1.65% in order to offset the apparently larger “january effect”.  The 2011 and 2012 adjustments were the largest for January since 1965.

The following chart shows that the January seasonal adjustments added about 100,000 more jobs in 2011 and 2012 compared to the application of a longer run (10 year) average of seasonal effects.  The chart also shows that the January effect for 2013 (+1.598%) is only slightly above the ten-year average.  The large employment decline in January 2009 had a minimal impact on the adjustment factor last month, adding only about 33,000 more jobs.

157,000 additional jobs in the past month, with 33,000 of the gain due to a generous seasonal adjustment, indicates that the job market is weak.  The good news on Friday came from the adjustments to the payroll reports for late 2012.  The January 2013 report is subject to more revisions.  At this point in the recovery, with the unemployment rate hovering near 8%, payroll employment growth of less than 200,000 per month is disappointing.

The January Effect and the Jobs Report

Expect tomorrow’s jobs report for January to indicate that the economy “added” between 250,000 and 300,000 jobs.  Also expect jobs growth in the spring of 2013 to be disappointing.  These expectations have nothing to do with budget negotiations in Washington, the impact of austerity measures in the Eurozone, or corporate earnings reports.  The pattern of strong employment growth in January followed by disappointing payroll reports in the spring is the result of the BLS seasonal adjustment procedure.

One year ago the BLS reported that nonfarm payroll increased by 275,000 between December 2011 and January 2012 — the largest increase in employment since the recession (excluding May 2010 when hundreds of thousands of seasonal Census workers were hired).  In fact, nonfarm payroll decreased by 2.67 million employees, but that decline was much smaller than the BLS statistical model projected.

The BLS seasonal adjustment procedure is a moving average process, which means that seasonal factors change over time.  The BLS seasonal  factors in January 2011 and January 2012 were unusually large because they reflected a historic decline of 3.7 million jobs between December 2008 and January 2009.  The BLS X-12 ARIMA model for seasonal adjustment viewed this massive decline in employment as a signal that the “January effect” in payroll employment had become more pronounced.  The procedure requires that future January’s would have larger projected employment declines.  To be clear, a larger “January effect” is measured relative to other months of the year.  If the new seasonal factors add 100,000 more jobs in January compared to the previous factors, a comparable number of jobs will be subtracted from other months of the year.  Hence bigger “January effects” mean smaller payroll gains in other months, most notably the spring.

The data from last January suggest that it was a particularly deep recession, and not changing seasonal factors, that accounted for the steep employment decline four years ago.  The legacy of the 2008-2009 decline is likely to still have an impact on BLS seasonal factors, but not by as much as in 2011 and 2012.  Nonetheless, it would not be surprising to see surprisingly strong job growth of 275,000 in tomorrow’s report, and weaker than expected growth in April and May.

Welch Consulting Employment Index Continued its Decline in December

The Welch Consulting Employment Index was 94.5 in December; down from 94.6 in November.  An index value of 94.5 means that full-time equivalent employment (from the BLS household survey) is 5.5% below its level in the base year of 1997, after adjusting for both population growth and changes in the age distribution of the labor force.  The index had recovered this fall from the sharp declines experienced in the summer of 2012, but has fallen for two straight months.  Moreover, the index is now below its level in March 2012.  Full-time employment has not quite kept pace with population growth over the past nine months.  The Welch Consulting Employment Index has grown by less than one percent per year over the past two years.

The Welch Consulting Employment Index, disaggregated by gender, is 92.4 for men and 97.1 for women.  Both the indices for men and women are down slightly from November.  Over the past nine months the men’s index is down 0.1% while the women’s employment index is down 0.8%.  Over the past two years the men’s employment index has grown by 1.4% per year and the women’s index has grown by 0.4% annually.

Technical Note: Full-time equivalent employment equals full-time employment plus one half of part-time employment from the BLS household survey.  The Welch index adjusts for the changing age distribution of the population by fixing the age distribution of adults to the 1997 base year.  The Welch Index adjusts for population growth by fixing total population to its 1997 level.  Seasonal effects are removed in a regression framework using monthly indicator variables.

Williston, North Dakota: Boom Town

Employment is growing at a faster rate in Williston, North Dakota than anywhere else in the U.S.  Williston is located in northwest North Dakota, about 70 miles south of the U.S.-Canadian border.  Northwest North Dakota is the center of the Bakken oil boom, which has dwarfed any other energy booms in North Dakota and Montana.  The employment boom in Williston over the past two years is one of the most dramatic since the U.S. Department of Labor began collecting local employment and unemployment data.

Williston is a small city (a micropolitan area according to the Census Bureau) where employment grew modestly from 1990 to 2005 and by 10% per year from 2005 to 2010, despite the global recession.  Growth in Williston really began to take off about two years ago.  The unemployment rate in Williston is 0.7%, or 1/11 of the U.S. unemployment rate.  Over the past two years employment has grown by more than 40% per year which is 26 times faster than in the rest of the U.S. and over 29 times faster than growth in Williston prior to 2005.  To put this into perspective employment in Williston is now increasing by the same number of jobs every four days that used to be created each year from 1990 to 2005.

The following chart shows that employment has doubled in Williston in the past two years.  Between 1990 and 2005 employment grew in Williston at an annual rate of 1.37%.  Over the past two years employment in Williston has grown by 2.86% per month.

There are growing pains associated with the employment boom.  The latest data from the Williston police department indicate that both property crimes and violent crimes have increased substantially in Williston, but roughly in proportion to the increase in employment.  The following charts compare the growth in crimes reported by the Williston Police Department to the growth in employment.

Williston is the quintessential energy boom town.  Employment is growing at an astronomical rate.  Wages are also rising — starting pay for high school graduates now tops $50,000 in the energy boom areas in North Dakota and Montana.  The average weekly wage in North Dakota has risen by 27.1% over the past three years, or 5.2 times faster than in he U.S. overall.  As employment has grown so quickly in such a short time the cost of rental housing has soared and the number of violent and property crimes have increased substantially.  These are just some of the growing pains associated with an economic boom.

The Welch Consulting Employment Index Continued to Rebound in October

The Welch Consulting Employment Index is 94.8 for October 2012, up 1.4% from October 2011 (seasonally adjusted).  An index value of 94.8 means that full-time equivalent employment (from the BLS household survey) is 5.2% below its level in the base year of 1997, after adjusting for both population growth and changes in the age distribution of the labor force.  The index is at its highest level since March 2012.  The index is 2.0% higher than its level two years ago and is 2.9% above its lowest level ever reached in July 2011.  The index had fallen sharply in the spring and early summer but has recovered all of those losses over the past two months.

The Welch Consulting Employment Index, disaggregated by gender, shows that the labor market recovery has been stronger for men than for women since 2009.  The index for men is 92.6 for October 2012, up 1.9% over the past twelve months, and up 3.0% since October 2009.  The index for women is 97.5 for October 2012, which is down slightly over the past month, and up much less (0.9%) over the past twelve months and past three years (0.7%) than it has been for men.  Despite the difference in trends over the past three years favoring men, the index for men remains well below the index for women.  This is because men lost many more full-time equivalent jobs (a decline of 9.5%) than women (a decline of 5.0%) from the beginning of 2008 through the fall of 2009.

Technical Note: Full-time equivalent employment equals full-time employment plus one half of part-time employment from the BLS household survey.  The Welch index adjusts for the changing age distribution of the population by fixing the age distribution of adults to the 1997 base year.  The Welch Index adjusts for population growth by fixing total population to its 1997 level.  Seasonal effects are removed in a regression framework using monthly indicator variables.

Why Even Mark Zandi Can’t Improve ADP’s Forecast of the BLS Jobs Report

This is the first month that the ADP national employment report is being produced in conjunction with Mark Zandi and Moody’s Analytics.  Previously, Macroeconomic Advisors helped ADP generate forecasts of the Bureau of Labor Statistics (BLS) nonfarm payroll employment report.  This month’s report was released with the announcement of a partnership with Mark Zandi and Moody’s Analytics and a newer and better methodology for predicting the key BLS jobs number.  The ADP report typically is released one or two days prior to the BLS report which is released the first Friday of each month.  ADP claims that, since 2001, the correlation between its forecast of the change in payroll employment and the BLS change in payroll employment is .96.  If this is true, as I explain below, the ADP report is either very close to being the best possible forecast of the BLS employment change or ADP has been very lucky in its forecasting over the past decade.  Mark Zandi and Moody’s Analytics will have a very difficult time improving on the previous track record for ADP.

Since 2001, the average change in BLS monthly payroll employment has been an increase of 7,000 employees per month.  There is considerable dispersion in monthly changes in employment, however.  The standard deviation of changes in monthly employment has been 241,000 employees per month.  The BLS reports that the standard deviation in monthly employment changes due to “sampling variation” is 61,000 employees per month.  In other words, even if the BLS drew an equally large and representative sample of employers and generated a second independent count of the monthly change in payroll employment, it would not be surprising if the second calculation differed from the first by 61,000 employees.

By converting these standard deviations into variances, and taking a ratio of sampling variation to total variation, it follows that 6.4% of the month-to-month variation in BLS payroll employment changes is due to “noise” or “sampling variation”, and 93.6% of the variation is due to “true” changes in employment.  Even if the BLS drew an equally large and representative sample of employers and generated a second count of the change in payroll employment in a given month, the correlation between the two different BLS employment changes would be .968.  (Because a correlation coefficient is simply the square root of the percentage of variation explained, and .968 is the square root of .936).

This means that even if Mark Zandi had access to the same data as the BLS, it is unreasonable to expect a forecast to be correlated more closely than .968 with the employment change reported by the BLS.  A forecast of the BLS change in payroll employment can’t be more reliable than the report itself.  The BLS acknowledges that their reports are imperfect.  Even if the BLS could make repeated independent calculations in the same month the correlation between independent BLS calculations would be only .968.  Consequently, if in the future ADP claims that their new model generates forecasts that are correlated .97 or more with the BLS jobs report we should all be dubious.

Losing Ground to Great Britain

It is hard to admit it, but Great Britain is doing a much better job at creating jobs than the U.S.  That has not always been the case, but it’s been true for the past decade.  What’s even worse is that we are falling further and further behind our British friends.  The United States economy is still the largest in the world, but we are no longer the preeminent job creator in the developed world.  While it is understandable that our job growth is slower than in China and parts of the developing world, there is no reason why employment in the U.S. should be falling relative to employment in Great Britain.

The latest employment figures were just released by the UK’s Office for National Statistics.  About 71.3% of adults age 16 to 64 were employed in Great Britain, in the three-month period from June to August.  That represents a one percentage point increase from the ratio in June to August 2011 (70.3%).  Moreover, this means that the employment to population ratio, the preferred measure of labor force activity by most labor economists, is almost 4 percentage points higher in Great Britain than in the United States for adults age 16-64.

The following chart shows the employment to population ratio for adults in the United States than Great Britain from 1984 to 2011.  The employment rate in the U.S. was higher than in Britain in 17 of 18 years from 1984 to 2001.  In a typical year 1.7% more adults were employed in the U.S. relative to Great Britain.  Since 2001 the Brits have been working more.  For 10 straight years the fraction of adults working in the U.S. has been lower than in Great Britain, and the gap is getting wider.

Changes over the past year have only widened the gap in employment rates between the two countries.  The employment rate increased by a full percentage point in Britain but by only half as much in the U.S.  Both rates are lower than they were prior to the recession but the U.S. employment rate is 4.1 percentage points lower while the British employment rate is only 1.6 percentage points lower than in 2005.  The employment rate of 71.3% in Great Britain and 67.4% in the United States means that 4 percent fewer adults are working in the U.S. than in Great Britain.  This translates into 8 million fewer jobs in the U.S. than if our policies led to employment rates more comparable to the U.K.

Economists and pundits in Great Britain have complained that fiscal austerity has reduced growth in their output and employment.  Whether or not these criticisms are valid, Americans would be happy to have the same record of job creation over the past four years as the British.  The decline in our employment rate in the past four years is troubling.  The employment rates illustrated above exclude individuals age 65 and above, so this is NOT due to the aging of the baby boom.[1]  It should not be too much to expect the employment rate in the U.S. to equal the rate in Britain, and that would mean eight million more jobs.  Eight million more jobs would solve a lot of problems in this country concerning the deficit, poverty and the long-term unemployed.  The government does not create jobs but tax and regulatory policy can get in the way.  Let’s hope that the presidential candidate who wins in November can work with the Congress to reverse the course we are on so that the U.S. can once again reclaim its position as the biggest job creator in the developed world.

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[1] If one compares overall employment rates across countries it should be noted that there are actually a higher fraction of adults age 65 and above in Great Britain than in the U.S.

Job Destruction in the Golden State

Perhaps no state has more protective labor laws than California.  Hourly employees in California are required to receive time-and-a-half overtime pay for hours worked over eight but less than twelve in a day and twice their regular hourly rate for hours worked in excess of twelve in a day, even if the employee works fewer than 40 hours in the week.  Employers who fail to properly classify workers into hourly and salaried positions and pay appropriate overtime compensation are subject to potential lawsuits and penalties.  Employers are also required to provide meal breaks to hourly employees for shifts in excess of five hours in length and are subject to lawsuits and penalties if meal breaks are not provided, are provided too late in the shift, or if the breaks are too short in length.  In the past two years most retail chains in California have been sued over failure to provide “suitable seating” to cashiers.  According to California’s Industrial Welfare Commission all employers must provide suitable seating to all employees “when the nature of the work reasonable permits the use of seats.”  The unintended consequences of “labor-friendly” laws are that labor services become more expensive and work is then more likely to be outsourced to states and countries with fewer labor regulations and lower labor costs.

One of the results of strict labor laws and regulations is that California has contributed no new private sector jobs to the U.S. economy in the past decade.  This is a dramatic reversal of a trend that started before the Department of Labor began measuring employment by states and areas.  The California economy grew rapidly from the 1950′s through the 1980′s as private sector employment more than tripled and about seven million private sector jobs were created over a forty-year period.  Employment in California continued to grow, albeit at a slower rate than in the rest of the U.S., in the 1990’s.  In the last decade private sector job creation in California came to a grinding halt.

The following chart illustrates decade-by-decade growth rates in private sector employment in California and the rest of the U.S. since 1952.  Employment in California grew much more rapidly than the rest of the U.S. from 1952 through 1982, and slightly more rapidly than the rest of the U.S. from 1982 to 1992.  The slowdown in employment growth in California began in the 1990′s as job growth in other states outpaced growth in the Golden State for the first time in decades.  Private sector employment actually declined slightly in California from 2002 to 2012.

The record of job creation in California over the past two decades is even more lackluster if one looks more closely at employment by sectors of the economy.  For example, it is more difficult to outsource health care services to other states and countries because most health care professionals must be located near their patients.  In fact, the only parts of the private sector that have contributed to job growth in California over the past ten years have been industries in the health care sector.  As the following chart shows, while employment in hospitals, nursing homes, and outpatient health care providers grew briskly in California over the past ten years, employment in non-health care industries has dropped by 2.7% since 2002.

There are now fewer manufacturing jobs in California than there were in 1957 when the Dodgers were located in Brooklyn, the Giants played at the Polo Grounds, and California had about one-third as many residents as it does today.  There are many reasons why California employment has been growing slower than in the rest of the U.S. for at least two decades.  High marginal tax rates and more stringent environmental regulations are often cited as factors that raise the cost of doing business in California.  “Labor-friendly” laws and regulations have also likely been responsible for increasing labor costs and encouraging the outsourcing of jobs to other states and countries.

Two Million Fewer Full-time Jobs Created in this Recovery Compared to George W. Bush Recovery

Last week Nobel Prize winning economist Paul Krugman wrote “The best hypothesis about the US economy this past year and more is that it has been steadily adding jobs at a pace roughly fast enough to keep up with but not get ahead of population growth.”  Professor Krugman is correct.  Total employment in the U.S. stopped its recessionary decline in February of 2010, whether measured using the Bureau of Labor Statistics (BLS) household or establishment payroll surveys.  In the two and a half years since then the economy has steadily gained enough jobs to just keep pace with population growth and demographic changes.  This would be good news if starting from a position of full employment.  But starting from a labor market trough, after the worst recession since the Great Depression, the job market performance over the past 30 months is best described as treading water.  We can be relieved that employment did not fall even more, but what we have seen for the past 30 months is an extremely weak labor market recovery.

The labor market situation must be dismal when even one of President Obama’s strongest critics on economic policy, Jim Pethokoukis of the American Enterprise Institute, has understated the weakness of this jobs recovery.  In a recent post Pethokoukis observed that, according to BLS establishment payroll data, the “Bush jobs recovery” created 5 million private sector jobs while the “Obama jobs recovery” created 4.6 million private sector jobs.  Although true, that is only part of the story.

Pethokoukis didn’t raise two important issues.  First, in the “Bush jobs recovery” household employment grew more rapidly than payroll employment.  Economists can’t provide an exact accounting of the differences between the two employment series, but much of the difference is due to new start-ups, small businesses and the self-employed.  Small businesses and the self-employed are either underrepresented or missed entirely in payroll employment totals and births of establishments are very difficult to track.  However, it is clear that many people were starting their own businesses or taking jobs with small businesses in the “Bush jobs recovery.”

A focus on payroll employment also ignores the difference between part-time and full-time work.  In addition to the millions of jobs lost in the recession, millions more moved from full-time to part-time work.  For the labor market to fully recover, underemployed workers in part-time jobs must find full-time work.  Consider a comparison of gains in full-time jobs during the two most recent recoveries.  The “Bush jobs recovery” began in August 2003 while the “Obama jobs recovery” began in February 2010.  The comparison is over a 30 month periods because the most recent data available are from August 2012.  The “Bush jobs recovery” created about 5.59 million  full-time jobs in 30 months compared to 3.51 million in the “Obama jobs recovery.”  The 2003 -2006 recovery was not as robust as previous recoveries but still produced two million (59%) more full-time jobs in 30 months than have been created since February 2010.

Welch Consulting has developed an employment index based on the BLS household survey that accounts for differences between full-time and part-time work, as well as the changing age and gender distribution of the workforce, population changes, and seasonal effects.  The index has moved up and down since February 2010 but is imperceptibly different from 30 months ago.  No change in the Welch Index means the economy created full-time equivalent jobs at the same rate as population growth.  In contrast the Welch Index steadily increased from 2003 to 2006.

A side-by-side comparison of the two recoveries is easier if one compares percentage changes in the index relative to the employment trough (beginning of each jobs recovery).  The following chart shows that after 25 months the Welch Index gained 2.3% in the “Bush jobs recovery” compared to 1.8% in the “Obama jobs recovery.”  Just five months ago the difference in the two recoveries was modest.  In the past five months nearly all of the gains in full-time equivalent employment (relative to a growing population) have been lost.  The full-time equivalent employment to population ratio is no better than it was in February 2010, at the end of a deep and prolonged recession.  In contrast in the “Bush jobs recovery” full-time equivalent employment growth was accelerating and grew much faster than the adult population over the corresponding time period (September 2005 to February 2006).  By 30 months into the recovery the index had grown over 3%.

Recognizing that President Obama inherited an economic mess, the amount of job creation on his watch has been disappointing.  What looked promising in early spring 2012 has stalled and the hope for a “recovery summer” faded long ago.  The job creation record under President George Bush’s leadership was not only better at this stage in the recovery, it was improving.

Any President has a limited impact on the rate of job creation.  Economists may disagree about the magnitude of the effect of tax policy uncertainty on job creation, but none would advocate a system where businesses large and small are uncertain of tax rates just four months in the future.  Tax policy is, however, the responsibility of both the President and Congress.  The President has a much greater impact on the regulatory landscape through the executive branch.  Labor market regulations, such as those in the Fair Labor Standards Act, can also discourage hiring (and encourage outsourcing).  It is difficult to tell, at this time, how much the Obama Administration’s expansion of regulations has had a chilling effect on hiring.

The Obama campaign will remind us that in early 2009, for about six months, the economy was losing 700,000 to 800,000 jobs per month.  The more pressing issue, however, is which candidate has better policies to help employment grow relative to our population over the next decade.  Some policies require bipartisan cooperation in a divided Congress.  Other regulatory reforms are more directly under the control of the executive branch.  Let’s hope the Presidential debates challenge the candidates to describe regulatory reforms that will reduce the headwinds and even help foster job creation in the U.S.