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.

A Guide to Friday’s April Jobs Report

An important component of Friday’s April jobs report is the seasonally adjusted change in non-farm payroll employment.  Last month’s report indicated an employment increase of 120,000 while this month’s ADP survey showed employment grew by 119,000.  Another gain of 120,000 jobs or less in April will be evidence that the labor market recovery has slowed.  An increase of 200,000 jobs is required to maintain the growth seen during the mild winter.

April is typically a much better month for payrolls than March because of seasonal effects.  Employment will be higher in April than March as it has been in every year since 1949.  Even in 2009, in the depths of the deepest recession since World War II, payroll employment grew by 182,000 between March and April.  The key question for Friday’s report is whether the raw increase in employment numbers will be large enough relative to the BLS seasonal adjustment factor.

Last year employment grew by 1.18 million between March and April, but that translated to a gain of only 251,000 after the BLS seasonal adjustment.  Seasonal adjustment factors evolve over time to reflect changing economic conditions.  The March to April adjustment has been growing; it has been larger in the past three years than it was throughout the previous decade.  Last year’s report would have indicated an employment gain of 400,000 in April if the seasonal adjustment factor from a decade ago had been used.

Since October 2011 employment has been 1.43% higher, on average, than twelve months earlier.  If that trend holds in April and the seasonal adjustment factor continues to grow, seasonally adjusted employment will increase by 200,000.  It is important to note that the margin of error for the BLS estimate of a one month employment change is 100,000.  Nonetheless, if the April increase is only 120,000, as it was in March, the employment change over the past two months will be significantly lower than in the previous six months.

One month’s BLS employment report is noisy, subject to substantial seasonal adjustment, and should be interpreted with caution.  In the six months between August 2011 and February 2012 payroll employment grew by more than 200,000 per month, on average.  The weak ADP report this morning, combined with increasing new unemployment insurance claims, suggests that we will see employment growth closer to 100,000 than 200,000 on Friday.  A second consecutive month with growth of 120,000 jobs or less would be enough evidence to conclude that the recovery has slowed.

Could it be the Weather?

Friday’s jobs report showed that the economy lost almost 2.7 million jobs between December 2011 and January 2012.  That’s pretty good for a January.  In the world of labor statistics and seasonal adjustments it translates into a gain of 243,000 jobs.  How does that work?  The Job loss of 2.02% in January of 2012 was better than what we have seen recently.  If we exclude the change from December 2008 to January 2009, at the depths of the recession, the average December to January change since 2006 was a decline in employment of 2.11%.

We learned on Friday that employment is 9/100 of one percent higher than it would be have been if January 2012 was like the typical January in recent years.  With total employment in the U.S. of approximately 130 million, this means there were 117,000 more people working in January than we would have otherwise expected.

What does this mean for our economic outlook?  It could be that employment was slightly higher due to an unusually mild winter.  It could be that fewer seasonal workers were hired heading into the holidays and laid off in January.  The January employment declines in retail and leisure and hospitality were unusually modest; 3.4% compared to the typical 3.6% decline.  These two industries account for half of the 117k additional jobs.

Friday’s jobs report may be signaling that the labor market recovery is accelerating as we head into 2012.  Or it may indicate that consumer spending was a little higher during an unusually mild January.  If the latter is correct we should be prepared for smaller than usual employment gains as we head from winter into spring.