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.

New Jobless Claims: 2013 Has Been a Good Year for Seasonal Adjustment

Headlines have highlighted the fact that  new jobless claims have fallen to 335,000 and 330,000, respectively, in the past two weeks.  News reports state that new unemployment insurance claims have dropped to their lowest levels in five years.  These statements are based on seasonally adjusted data.  The following table shows seasonally adjusted and unadjusted new jobless claims data in the first three weeks of 2012 and 2013.

	New Unemployment Insurance Claims
Date	Seasonally Unadjusted	Seasonally Adjusted
January 7, 2012	646,219	390,000
January 14, 2012	525,422	364,000
January 21, 2012	416,880	372,000
Avg First 3 weeks 2012	529,507	375,333
January 5, 2013	557,798	375,000
January 12, 2013	556,710	335,000
January 19, 2013	436,766	330,000
Avg First 3 weeks 2013	517,091	346,667

 The table indicates that while seasonally unadjusted new UI claims have been 2.3% lower in early 2013 than early 2012, seasonally adjusted new UI claims  dropped by 7.6% from one year ago.  The average seasonal adjustment factor in the first three weeks of 2013 reduced claims by 33% while the adjustment factor was 29% over the same three weeks in 2012.  Had the same adjustment factors been used in both 2012 and 2013, new UI claims would have averaged 366,533 per week in January 2013.

An average of 366,533 new UI claims per week is better than we have seen for much of the recovery, but it is certainly not the lowest level in the past five years.  As recently as late September and early October of 2012 the average number of seasonally adjusted new UI claims fell below 360,000 per week.  The last few weeks have seen unusually large seasonal adjustment factors making the difference between seasonally adjusted and unadjusted new UI claims larger than we have seen in recent memory.  The news on jobless claims is good, but the large seasonal adjustment may be overstating the improvement over the past few weeks.

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.

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.