Fowler Financial Management
February 6, 2011
Aside from the confusion created by differing opinions regarding GDP, GNP, and other economic indicators, there is nothing more mind boggling than trying to understand the real meaning of the Employment vs. Unemployment numbers tossed about each week.
The “unemployment” (Jobless Claims Report) numbers published weekly is designed to inform us of how many new people filed for unemployment compensation in the previous week or month. The report is very volatile and is normally reported as an average of the past four weeks. The headline news last week was that unemployment had decreased by 0.4% (which is what brought the unemployment percentage down to 9%) in January. If “seasonal adjustments” had not been applied, or applied using the same methodology as in prior reports, the percentage would have been higher, not lower. It appears that if there really was a decrease in the number filing claims, the reason is probably due to an easing of company lay-offs, not from an increase in new jobs. Note that the report is on the number of estimated new jobless claims, not the number of jobs gained or lost within the economy, which are reported the first Friday of each month as the “Employment Report”.
The Employment Report distributed Friday of last week was not as uplifting as was the claim of lower unemployment reported in the Jobless Claims Report , which claimed that there was a gain of only 36,000 jobs in the month of January; even less encouraging considering that the number would have been a minus 53,000 jobs if they had used the same formula used in January of 2010! If you think that is confusing, how about this: If the unemployment rate dropped by 0.4% then the number of newly employed should be over 500,000 people, not 36,000! Facts get in the way of reality here; “unemployment” is nothing more than the total of people on the jobless claims roles at a snapshot in time. As people fall off the rolls due to running out of benefits, stop showing up to collect, take a short term part time job, or just stop looking for at least four weeks, the number goes down, even if the actual number of unemployed does not. If the number of lay-offs decreases, thus not adding as many to the weekly new claims, the number goes down. This is why it is so important to keep an eye on the U-6 unemployment number which includes those collecting unemployment benefits, plus those out of a job who want and need one, but who are not collecting unemployment benefits; The latter being people who get labeled “marginally attached”, or “discouraged” unemployed – of course they are discouraged, but they still want and need a job! Know anyone out of work for more than one year? Anyone who has been sick or has just taken a break from looking for a while? They are not counted in the headline report.
There is a growing awareness of how the Bureau of Labor Statistics “manages” the numbers by simply changing the assumptions. For example: They use something called the “Birth-Death Model” which is designed to factor in new jobs that are created (but not yet reported) by new “start-up” companies that offset the number of jobs lost due to companies going out of business. Since it may take a year or longer for information regarding the opening of a new business, or the closing of one, to become known, the guesswork is more art than science. Since waiting a couple of years for accurate numbers would provide useless information to those attempting to manipulate the economy now, guesses have to be made – right or wrong. An attempt to “smooth” the numbers is made by using data taken from the past 60 month period, which works pretty well when economic cycles are “normal”, but get all out of whack when cycles are deeper and more protracted than they were during the period from which the data was mined. It is correctly assumed that as businesses close and jobs are lost there are also new businesses being opened creating new jobs – providing an offset. The trick is figuring out whether the offset is a net positive or net negative, and by how much. The BLS is very slow to adjust their bias which results in over projecting the number of net jobs that have been created, sometimes in fairly large numbers. They adjusted their bias for this January with an assumption that the economic recovery is becoming more robust so there must be a resurgence of the opening of new businesses and a slowing of the closing of old ones. The difference between a plus 36,000 new jobs and a loss of 53,000 is all in that bias, and, the sages of the financial media world acknowledged that even the plus 36,000 number was disappointing. On top of this, the rate of accuracy of the reporting model is +- 5%, a whopping 680,000 jobs!
Regardless of the methodology used to guess at these numbers, the truth seems pretty clear: we are far from creating enough jobs to even cover the number of new entrants searching for them—youth ready for permanent work, and the thousands of people finding they need to go back to work after a spouse loses their job, or after discovering a large portion of their retirement nest egg has evaporated! If the real unemployment percentage is close to 17% (U-6), we would have to create approximately 272,000 jobs per month for five years to get the unemployment percentage down to 5%. Unfortunately that number only covers the existing unemployed. We need even more jobs to employ the new entrants to the marketplace. In a normal growth economy the number retiring from the workplace would now be about equal to the number of new entrants, however, baby boomers are not retiring at a “normal” retirement age, since their retirement funds have taken such a hit over the past 10 years. There is an additional number not retiring at a “normal” age due to worry that inflation will eat up what was earlier calculated as adequate savings. These numbers are not measured, only estimated, as accurate data for this category of worker is unavailable. The best source may be tax returns showing “earned” income while also showing receipt of Social Security payments, which is a data source that clearly indicates a group not retiring that probably would have done so if their retirement funds, the economy, and the future looked more positive. That source is not timely, therefore is useless for anything other than making guesses more accurate during a future economic downturn of the same nature. Of course, the statisticians creating these reports will use data from more than one source, all of which require extrapolation and subjective modifying factors, which are put into mathematical formulas that then take on the appearance of “fact”, enhanced by carrying out the results to at least two decimal points.
There is so much being said and written about the “employment and unemployment” numbers today that it is important to know more about what is behind the numbers. These thoughts are not the whole story, by any means, however, it seems useful to learn enough about how the numbers are produced to be able to make your own “adjustments” to those being headlined. The links below may be helpful in expanding your knowledge regarding these and other economic issues. I encourage you to make this a research project, as the more you know about the information you are fed by the government and the media, the better decisions you will make about managing your life and your assets.
Bill Fowler
Bill Fowler
Investopedia description of the levels of measurement of joblessness: http://www.investopedia.com/articles/economics/10/unemployment-rate-get-real.asp
Investopedia description of Jobless Claims Report: http://www.investopedia.com/university/releases/joblessclaims.asp
Latest Release Jobless Claims Report: http://www.dol.gov/opa/media/press/eta/main.htm
BLS Birth-Death site: http://www.bls.gov/web/empsit/cesbd.htm
Fowler Financial Management
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Fax 972-542-0801
Email: bill@ffmria.com
Web Site: http://www.ffmria.com/
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