Be Wary of the Seasonal Adjustment in the July Jobs Report

The Bureau of Labor Statistics (BLS) will almost surely report that payroll employment declined by over one million jobs on Friday, but it will all be erased by a procedure known as seasonal adjustment.  The headline number for job creation reports the change in jobs after making statistical adjustments that attempt to eliminate the employment fluctuations due to weather and other seasonal factors.  The July jobs report will have the second biggest seasonal adjustment (after December to January) of the year.  July is typically a much weaker month for payroll employment than June, because of seasonal factors.  Whether the headline number for job creation exceeds expectations or is viewed as disappointing may have more to do with the non-partisan statisticians at the BLS than the Federal Reserve, the Congress, or the Obama Administration.

Over the past decade employment fell between June and July by 1.33 million jobs, on average.  In contrast, seasonally adjusted payroll growth between June and July has been reported as an increase of 300, on average.  (That is 300 not 300 thousand jobs.)  This means the BLS has consistently adjusted a decline of 1.33 million jobs from June to July to be reported as no change at all, seasonally adjusted.  Put somewhat differently, even if there are no raw employment gains in Friday’s report, BLS statisticians will conclude that this is equivalent to the economy creating over 1.33 million jobs in a single month, after seasonal adjustment.

Last July employment was 1.3 million lower than it was in June, but that translated to an increase of 96,000 jobs after applying the BLS seasonal adjustment factor.  Although the BLS allows seasonal adjustment factors to evolve over time to reflect changing economic conditions, the June to July adjustment has been fairly stable over the last decade.  Nonetheless, even the slight difference between using the 2010 and 2011 seasonal adjustment factors for June to July is equivalent to a difference in 111,000 jobs for the headline payroll employment report on Friday.

Over the first three months of 2012 payroll employment was 1.56% higher each month, on average, than the previous year.  Over the past three months payroll employment was 1.34% higher each month, on average, than the previous year.  The labor market recovery has slowed.  Every economist and politician is looking to Friday’s report for an indication of whether the recent trend is likely to continue.

One monthly BLS employment report is noisy, subject to substantial seasonal adjustment, and should be interpreted with caution.  Sophisticated observers of Friday’s July report will be looking at both the seasonally adjusted headline number, as well as seasonally unadjusted figures (compared to July 2011), and revisions to the May and June reports, before reaching any conclusions about the direction of the labor market.

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