The Welch Consulting Employment Index Continues Its Sharp Decline

The Welch Consulting Employment Index fell to 93.3 in July 2012.  An index value of 93.3 means that full-time equivalent employment (from the BLS household survey) is 6.7% 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 down sharply over the past three months; the index was 94.7 in April 2012.  The index remains below its level three years ago and is only 1.2% above its historic low reached exactly one year ago.  The index remains weak because part-time employment is at historically high levels and employment growth has barely exceeded population growth over the past year.

The Welch Consulting Employment Index, disaggregated by gender, shows that the labor market recovery has been much weaker for women than men since 2009.  The index for men is 91.2 for July 2012, up 1.9% over the past twelve months, and up 1.2% since July 2009.  The index for women is 96.7 for July 2012, up 0.5% over the past twelve months, but down 1.8% over the past three years.  Finally, since President Obama took office in January 2009, the employment indices are down 2.8% for men and down 4.9% for women.

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.

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.

The Unemployment Rate is 8.216%

The BLS announced today that 80,000 jobs were created in the U.S. in June, compared to 77,000 in May and 68,000 in April.  Despite the small apparent increase in payroll employment gains from April to June, there is no meaningful difference in the number of jobs created between April, May and June; their difference is well within the statistical margin of error.  Payroll employment gains are reported to a level of accuracy far beyond our ability to count all employees in the U.S. in real-time.  The difference between an employment gain of 80,000 and a consensus forecast of 125,000 is still far below the margin of error for estimated job growth.  While sophisticated labor market observers recognize this fact, the casual consumer of economic news should be more concerned about longer term labor market trends than a single month’s report.

The BLS reports the number of jobs created to the nearest 1,000, even though the standard error of each monthly estimate is approximately 60,000 jobs.  This means that the margin of error for each month’s payroll employment gain is about 100,000.  For non-statisticians, labor economists are only 90% certain that job growth in June was within an interval from a loss of 20,000 jobs to a gain of 180,000 jobs.

The unemployment rate is reported to the nearest one tenth of a percentage point, while the standard error of the unemployment rate estimate is about .12 percentage points.  In other words the BLS reports the unemployment rate to the nearest 0.1 while the margin of error is approximately 0.2.

If the BLS were to report payroll employment similarly to the unemployment rate, payroll employment would be reported to the nearest 50,000 jobs not the nearest 1,000.  If the BLS reported payroll employment rounded to the nearest 50,000 jobs, those without a statistics background would recognize how noisy monthly employment estimates can be.

Put somewhat differently, if the BLS instead reported the unemployment rate to the same level of inaccuracy as payroll employment, it would report the unemployment rate to the nearest two one-thousandths of one percent.  If that were the case the BLS would have reported that the unemployment rate ticked up from 8.206% in May to 8.216% in June.

The labor market recovery is very weak because over three months, where the margin of error is much smaller, employment gains totaled 225,000 jobs.  If the labor market were healthy, the economy would create more than 225,000 jobs per month not per quarter year.  During the recovery in 1983-1984, there were 15 straight months where job growth exceeded 225,000 per month.  We are on a long slow road back to full employment.

56.5% of the Job Losses Since 2009 Occurred for Women

Last month the Romney campaign cited Bureau of Labor Statistics (BLS) data to report that 92% of all job losses since President Obama took office in January of 2009 were suffered by women.  The media reaction to the Romney campaign’s claim was mixed, but most analysts did not question the accuracy of the underlying data.  Some analysts opined that it was expected that most of the job losses in the past three years occurred for women because government employment has contracted slightly since January 2009.  My blog post from April showed that 95% of the jobs eliminated at the U.S. Postal Service were held by women.  The problem with all of these analyses is that they are based on faulty data.

The BLS announced on its website yesterday that:

Estimates of women employees in the U.S. Postal Service and some related series from the Current Employment Statistics survey were temporarily removed from the BLS data-retrieval system on May 14, 2012. BLS staff discovered data-processing errors that occurred during the November 2009–April 2012 period and resulted in an incorrect ratio of women employees to all employees. Correcting these errors will increase the number of women employees but does not affect total employment levels. Series of women employees were removed for the U.S. Postal Service, federal government, government, service-providing, and total nonfarm.

Although I am not sure about how the BLS discovered their error, I believe I have an explanation.  Alan Robinson of the Direct Communications Group (@CEP_Observer) didn’t believe the numbers in my April blog post (three weeks ago) about women’s job losses at the US Postal Service.  After I sent him the data I used and a link to the BLS website, Alan still didn’t believe the data.  His inquiries to the BLS caused their economists and statisticians to take a closer look at the data, which uncovered the apparent errors.

The BLS is assigned an incredibly difficult task, and generally produces extremely reliable and valuable data.  This time they made a mistake, and are working to correct the problem.  Until the establishment employment data for women are updated, our best information on the gender composition of job losses comes from the household survey, also administered by the BLS and the Census Bureau.  The household survey shows that the fraction of the adult population that was employed:

• Declined from 66.2% to 64.3% for men, between January 2009 and April 2012
• Declined from 55.3% to 53.0% for women, between January 2009 and April 2012

Women comprise about 52% of the working age (civilian) population.  The 2.3% decline in employment relative to population for women means that 2.89 million fewer women were employed in April 2012 than would have occurred if the employment to population ratio for women had remained steady since January 2009.  Similarly, there are 2.24 million fewer men employed in April 2012 than would have occurred if the employment to population ratio for men had remained constant since January 2009.

The calculations above indicate that the best estimate is that 56.5% of the relative employment declines since January 2009 were suffered by women.  Next month the BLS will post updated data on the gender composition of employment based on the establishment survey.  There are many reasons why the household and establishment survey data will look somewhat different, but it is likely that the revised establishment numbers will mirror the household data and show that the majority (but far less than 92%) of the jobs lost since January 2009 were jobs held by women.

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.

Senior Recovery or Delayed Retirement?

A closer look at today’s BLS jobs report reveals that 30% of the job gains in the past two years (and 27% in the past year) have been due to increases in the employment of adults age 65, despite the fact that senior citizens represent less than 5% of the labor force.  In March 2012 there were one million more employed adults age 65 and above compared to March 2010.  Employment growth among seniors has been about nine times higher than for the rest of the adult population.  The rapid job growth for seniors is because: (i) we added 3 million seniors in the past two years, and (ii) older workers are delaying retirement.  The 2008 recession and sharp drop in home values reduced the wealth of many households.  It is likely that many workers who reached age 65 in the past two years have delayed their retirement in response to the decline in their net worth.