Monday, December 5, 2011

US Employment Indicators

The Birthers were quiet on Friday following the release of November’s payroll employment report. They usually get all hot and bothered about the so-called birth/death adjustment (BDA) to total payrolls. Whenever it is up, they claim that it is bogus and immediately subtract it from the total to demonstrate that the labor market is weaker than suggested by the headline employment number. They did that last month when the BDA added 102,000 to October’s payrolls, which showed a gain of 80,000 on a preliminary basis. November’s report showed that this adjustment reduced payrolls by 29,000. Yet the Birthers didn’t bray that the increase in payrolls must have been greater than the first-reported official estimate of 120,000.

The Birthers will be back as soon as the BDA is positive again, which won’t be long. The statistical model used by the Bureau of Labor Statistics (BLS) is “designed to reduce a primary source of non-sampling error which is the inability of the sample to capture, on a timely basis, employment growth generated by new business formations.” Even during 2008, 2009, and 2010 the BDA added 724,000, 477,000, and 288,000 to payrolls. By the way, that adjustment is added to the data before the total is seasonally adjusted. Yet the Birthers always make the serious mistake of comparing the seasonally unadjusted BDA to the seasonally adjusted total.

Friday’s employment report was mostly chock full of good news. However, there was some bad news too. Let’s review:

(1) All employment measures showed solid gains in November. Total nonfarm payrolls rose 120,000 and household employment jumped 278,000 during the month. Private-sector employment rose 140,000 according to the official release, while ADP reported a solid gain of 206,000. The irrelevance of the BDA issue is confirmed on a regular basis by the close correlation of the trend and magnitude of changes in the comparable BLS and ADP statistics. So for example, the private payrolls over the past 12 months have increased 1.88 million according to BLS and 1.86 million according to ADP. Household employment (which includes government workers) is up 1.67 million over this same period.

(2) The revisions in the previous two months tend to be more important employment indicators than the preliminary estimate. I have long argued that more weight should be placed on those revisions than on the first reported estimate. The revisions tend to be upward during economic expansions and downward during recessions. September’s preliminary gain for total payroll employment has now been revised up twice by a total of 107,000 (from 103,000 to 158,000 to 210,000). October’s estimate has been revised up once by 20,000 (from 80,000 to 100,000), and will likely be revised upward again when December payroll data are released on January 6. Over the past 12 months through October, revisions have boosted payrolls by 326,000 (231,000 the past three months).  

(3) Total hours worked rose to a new cyclical high during November. The index of aggregate weekly hours in private industries edged up 0.1% during the month, despite a 0.5% downtick in manufacturing, which seems a bit odd, given the strength in industrial production.

(4) The evidence on part-time vs. full-time jobs is mixed. The household survey shows that full-time employment increased by 323,000 during November to a new cyclical high of 113.1 million. That’s still 8.7 million below the record high of 121.8 million during November 2007. Part-time employment fell 91,000 during the month, and remains near recent record highs. During November, nearly 20% of household employment was part time.

The payroll data show that the temporary help services industry increased headcount by 22,300 during November. Other industries that tend to rely on part-time workers also expanded during November, with retail and leisure & hospitality jobs up 49,800 and 22,000, respectively, during the month. Over the past 24 months, the temporary help service industry added 484,000 employees, accounting for 21.4% of the gain in total payroll employment.

(5) The pace of hiring is improving, but the pace of firing remains elevated. The latest available JOLTS data through September show that the pace of hiring rose during the month to the highest in 16 months. On a 12-month basis, total hiring started to exceed total separations during September 2010 for the first time since the spring of 2008. Over the past 12 months through September, total hires were 48.0 million and total separations were 46.7 million, yielding an employment gain of 1.3 million.

This improvement in hiring activity is consistent with the Monster Employment Index, a measure of online job ads. This index has been trending higher all year. However, it did dip slightly during November, but remained at the third highest reading of this year. All of the major industries included in the index were flat to down during November with the exception of Transportation and Warehouses, which climbed to a new high for the series going back to 2003. While initial unemployment claims rose back above 400,000 during the week of November 26 (402,000), the four-week average was 395,750 during that week.

(6) The bad news is that wage gains aren’t keeping up with inflation. The good news is that the falling real cost of labor should continue to boost employment. Average hourly earnings for all workers rose 1.8% y/y through November. Over the same period, we estimate that the CPI rose 3.6%. So there has been an erosion of purchasing power for workers. In the past, real pay per worker tended to be highly correlated with productivity. Recently, there has been a divergence as productivity continues to grow rapidly. That’s certainly boosted corporate profits, which in turn may be starting to boost employment. My mantra: “Jobs are created by profitable companies, not by government programs.”

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