Turning the Corner

When I saw last Friday’s encouraging jobs report I knew it would be controversial.  An increase in payroll employment of 243,000 is good news, but any January report contains a large seasonal adjustment because it is typically the weakest month of the year for employment.  The Bureau of Labor Statistics generates a new seasonal adjustment factor every month, to allow for changing economic conditions, but it means that no two January adjustments are the same.  Skeptics, such as Zero Hedge, correctly observed that the past two January seasonal adjustments have been especially large which might account for 100k of the job gain reported last week.

The Bureau of Labor Statistics is faced with an incredibly challenging task.  It must generate a near real-time count of the country’s total payroll and report it as if January was no different than June.  I know things are out of hand when Rush Limbaugh and Rachel Maddow are commenting on the appropriateness of the government’s seasonal adjustment process.  It is unfortunate that last week’s solid report was obscured by an opaque statistical methodology.   I prefer a more transparent method for presenting high-frequency changes in payroll employment.  My approach shows slow and steady improvement in the aggregate labor market throughout 2011.

First, I consider average payroll employment over a quarter year to mitigate the noise in any single month’s report.  Second, I compare year-over-year percentage changes in quarterly employment rather than use a confusing and complicated method for removing seasonal effects.  The following figure presents these changes in payroll employment for all of 2011 and January 2012.

Employment grew by 1% annually in the first half of 2011 and by 1.2% and 1.3% in the third and fourth quarters.  The January jobs report is encouraging because it reflects a 1.5% annual employment growth rate.  Of course the next two monthly reports will have to be equally strong to maintain a growth rate of 1.5% for the entire first quarter of 2012.

Quarterly year-over-year changes eliminate some of the noise in monthly reports and their evolving seasonal adjustments.  Conventional wisdom, fueled by noisy monthly reports, is that the labor market recovery sputtered in the second half of 2011.  In fact, the labor market has been improving slowly and steadily.  There are problems to be sure.  Annual employment growth of 1.5% is better than we have seen recently but it’s painfully slow given the deep recession.  More importantly, as I will show in future posts, the labor market remains especially weak for less skilled workers and in areas hit hard by the real estate crisis.

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