Why the April Jobs Report Could Be a Disaster
In a speech by Fed Chief Ben Bernanke the other day - the one that turned any lingering “risk off” thoughts in financial markets decidedly back to “risk on” (at least for the day) as another round of central bank money printing suddenly seemed possible again - the subject of a surprisingly good labor market being out-of-step with other economic indicators was raised when Bernanke commented:
… we cannot yet be sure that the recent pace of improvement in the labor market will be sustained. Notably, an examination of recent deviations from Okun’s law suggests that the recent decline in the unemployment rate may reflect a reversal of the unusually large layoffs that occurred during late 2008 and over 2009.
Though there were no explicit references to seasonal adjustments in the above, a number of analysts have noted that odd seasonal adjustments stemming from the 2008-2009 financial crisis could be one of the reasons why some economic data reported in recent months has been coming in much better than expected.
The thinking goes that, since the late-2008/early-2009 period was so horrific, it has resulted in subsequent late-year and early-year data being adjusted upward as if the economic storm that occurred four years ago was somehow weather related.
Of course, the just concluded unusually warm and dry winter is another reason why recent data has been surprisingly good as people were doing things in January and February that they would normally due in March and April, pulling demand (and job creation) forward. Some analysts say that upwards of 100,000 jobs a month in the recent job growth spurt - nearly half - could be “weather related”.
But, the seasonal adjustment question seems to have garnered little attention and, after looking into this a bit, it’s clear why. It’s a difficult subject to analyze and then have much confidence in drawing conclusions about - not just because of the high seasonality in the labor market in general but due to other factors such as the impact of the “birth-death model” and how dramatically jobs data is revised over time.
For all we know at this point, the lower jobless rate and impressive job growth in recent months could all be revised away someday.
In any event, it seemed worth looking into what, if any, impact the devastating economic data of the late-2008/early-2009 period might have had on the recent economic data and the Labor Department’s NFP (nonfarm payrolls) seemed like a good place to start since they provide both the raw data and the seasonally adjusted data.
Subtracting the former from the latter going back eleven years results in the following:
Note that January payrolls require a huge upward seasonal adjustment due to post-holiday layoffs and the annual auto plant retooling shutdown in July is the other period that economists have seen fit to give the raw job creation totals a big boost. Otherwise, you’d get these huge downward spikes every January and July that would make it more difficult to make sense of the data on a month to month basis.
As expected, if you add up all the bars in the chart above, you get zero (actually, it’s seven, not zero, but that’s likely due to rounding) and this makes good sense because, over the course of the year, what you add in January must be taken away over the next 11 months, otherwise, you’re adding to the total, not just smoothing things out to make better the data more meaningful over the short-term.
So, getting back to the inflammatory title of this post, the question is: How have these seasonal adjustment factors changed from before the financial crisis to after the financial crisis and how might that be affecting the labor market data?
In order to answer that question, the chart below was prepared showing the difference in the magnitude of the seasonal adjustments from the November to April period from before and after the financial crisis. For example, the average 2000-2007 adjustment to the raw NFP in December was +283,000, whereas, the average 2009-2011 adjustment was +406,000, hence the resulting blue bar for December extending by 123,000 above the x-axis below.
Taken collectively, the November to March seasonal adjustments that are in excess of what they were before the financial crisis totals some 201,000, or, about 40,000 per month over that five month period.
So, an alternative title to this post could have been “Odd Financial Crisis Related Seasonal Adjustments Have Accounted for 40,000 Jobs Per Month in Reported Payroll Gains”, however, that’s a rather unwieldy handful of words and not nearly as interesting as what that blue bar for April extending below the x-axis portends.
Now, before getting too worked up about what might happen in April - when job creation that would normally have occurred during that month doesn’t occur because those jobs were created back in February due to the nice weather and seasonal adjustments begin to work against the job creation totals instead of for them - it should be noted that this is not an exact science.
I don’t know what goes into the Labor Department seasonal adjustments and, importantly, the blue bars for the other six months of the year for the image above were all over the place and, in some cases, even bigger.
But, the thing that convinces me that this just might have some important meaning is that that the other data appeared to be random.
In the chart above, there is a clear pattern - five straight months of better seasonal adjustments in recent years than prior to the financial crisis and then comes the month of April.
In short, the one-two punch of a warmer winter and unusual seasonal adjustment factors stemming from the financial crisis could combine to create something of a disaster for those writing the labor market headlines in early-May when the April jobs data is reported.
19 Responses to Why the April Jobs Report Could Be a Disaster
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March 29, 2012
[...] morning reads: • Risk := ON (Psy-Fi Blog) • Why the April Jobs Report Could Be a Disaster (Iacono Research) see also The Winter of Our Content (Slate) • Could Weak Profit Growth Pressure Stocks? [...]
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March 29, 2012
[...] Why the April jobs report could be a disaster: the one-two punch of a warmer winter and unusual seasonal adjustment factors stemming from the financial crisis, Tim Iacono writes. Ben Bernanke suspects the same, Iacono adds, which would explain his tepid view of the labor market and why another round of Fed money printing again seems possible. Post your comment! [...]
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March 29, 2012
[...] Why the April jobs report could be a disaster: the one-two punch of a warmer winter and unusual seasonal adjustment factors stemming from the financial crisis, Tim Iacono writes. Ben Bernanke suspects the same, Iacono adds, which would explain his tepid view of the labor market and why another round of Fed money printing again seems possible. Post your comment! SeekingAlpha.com: SA Currents Tags: adds, adjustment, again, another, April., Bernanke, could, crisis, disaster, explain, Factors, financial, From, Iacono, jobs, labor, market, Money, onetwo, possible, printing, punch, Report, round, Same, seasonal, seems, stemming, suspects, tepid, unusual, view, warmer, winter, would, writes Leave a Reply Click here to cancel reply. [...]
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March 30, 2012
[...] Why the April jobs report could be a disaster: the one-two punch of a warmer winter and unusual seasonal adjustment factors stemming from the financial crisis, Tim Iacono writes. Ben Bernanke suspects the same, Iacono adds, which would explain his tepid view of the labor market and why another round of Fed money printing again seems possible. Post your comment! [...]
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March 30, 2012
[...] that would have differently happened in a spring. Others advise that a comfortable winter could be skewing a anniversary adjustments a Labor Department makes to their stagnation total so that month-to-month comparisons are [...]
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March 30, 2012
[...] іn thе spring. Others suggest thаt thе warm winter сουld bе skewing thе seasonal adjustments thе Labor Department mаkеѕ tο thеіr unemployment figures [...]
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April 1, 2012
[...] job gains have been overstated, not intentionally, but by using exaggerated seasonal adjustments. Iacono Research has some interesting explanations and charts. Tim Iacono sees a problem looming in about a month, [...]
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April 1, 2012
[...] Why the April Jobs Report Could Be a Disaster - “the one-two punch of a warmer winter and unusual seasonal adjustment factors stemming from the financial crisis could combine to create something of a disaster for those writing the labor market headlines in early-May when the April jobs data is reported.” [it also may not turn out to be an issue, but it is an interesting post and the type of thing you need to consider when looking at economic data - John] [...]
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April 1, 2012
[...] job gains have been overstated, not intentionally, but by using exaggerated seasonal adjustments. Iacono Research has some interesting explanations and charts. Tim Iacono sees a problem looming in about a month, [...]
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April 2, 2012
[...] job gains have been overstated, not intentionally, but by using exaggerated seasonal adjustments. Iacono Research has some interesting explanations and charts. Tim Iacono sees a problem looming in about a month, [...]
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Interesting…..
By my math, this combination would make the recent ~250K job growth closer to ~100K.
Maybe that’s why the Bernank isn’t really on board with all the recovery talk.
The problem I have with this analysis is that, as you suggest, the tinkering with the numbers has gotten so out of hand that I have no confidence in ANY of the numbers provided by The Man. If the April numbers turn out to be horrible, we can expect some new methodology will suddenly become apparent to the number crunchers in order to hide the truth, yet again.
The birth-death model, as you say is just one example of the sleight of hand employed by the magicians who conjure government stats. These stats are so wildly unreliable that almost no one in the real world takes them seriously any more.
It’s hard to know if BB is so deep in his fantasy world that he actually thinks ‘his’ numbers and theories are truly meaningful. But it doesn’t matter since he can’t admit the truth. It seems pretty obvious that people such as BB (and they are legion) will never be able to admit the obvious truth that, to quote Hudson from the movie ALIENS:
“We’re in some real pretty $hit now.”
I’m constantly amazed that the charade goes on, day after day. It seems reality should have interfered by now. I wonder if it’s just that America built up such a VAST reserve of ‘capital’ in various forms over about 125 years before the Fed that it’s taking a long time to piss it all away.
The other possibility is that I’m just too stupid to see the utter brilliance of AG, BB, Krugman and all the other people who plan and run our economy and cheer it on. The problem with this possibility is that common sense, history and experience tell me no one is that smart.
I think Hudson was right!
“I wonder if it’s just that America built up such a VAST reserve of ‘capital’ in various forms over about 125 years”
I believe it is something to that effect. Consider that no matter how bad things get, so long as America is the “least bad” then we will get investment capital from whoever has it.
What would you rather invest in, a coffee shop in Cairo, Rio de Janeiro, Athens, Beijing, Moscow, or DC?
The fact is that America is a relatively stable nation. We don’t have ethnic violence, no civil wars, “acceptable” levels of corruption, etc. America also has a lot of very intelligent people, and all of our engineers, scientists, doctors, etc will not suddenly lose all of their knowledge just because some bankers cooked some books.
DCX2
I agree that we’ve still got the edge on every other nation. I suspect it’s partly due to the original concept of a free market and the extremely fortunate abundance of natural resources we had at the beginning.
The concern I have is more that the continued erosion in our long term financial health combined with the lack of credible leadership (which is becoming VERY evident in part due to the internet) could lead to an event that causes a psychological panic among the populace.
I see that as more and more likely every day. As you degrade the dollar while lying about it, you make it more and more likely that people will hit a tipping point and lose faith in it, much like a bank run from the depression era. At that point, logic is out the window and VERY bad stuff can happen somewhat as we saw in NO after Katrina.
I’d MUCH prefer a sensible monetary policy and honest leadership than the “hope and pray” crap I’ve been hearing for a long time now… In the long run, I think honesty about the situation would help avert a crisis while this constant lying is setting us up for a much worse outcome.
I have to point out that a good number of those smart people you reference originated from outside the US - because American education simply doesn’t generate enough of them at a high enough level. If the US becomes less attractive - as it clearly is doing - then America’s failure/inability to plan for the longer term will be rather brutally exposed.
I don’t necessarily agree with that.
My father was never college educated, but he worked in power plants to help set them up and get them running. He’s worked a lot with folks around the world. Again and again, he says that folks from other countries *appear* to be book smart (they know Calculus really well!), but once you throw them into the real world they flounder like a fish out of water, because they have literally zero practical experience (they tend to do stupid things because they trust their numbers more than they trust experience). In particular, he hated people from India because they constantly thought they were smart when they were in fact pretty stupid.
It’s not to say that America in general is full of intelligent people - it’s not - but it is to say that the natives we have that *are* intelligent pretty much wipe the floor against any other nation. And when I consider whether I would want to live in the US, or a BRIC country…give me the US (see: no ethnic violence, no civil wars, etc)
Wouldn’t we see evidence of this somewhere in the claims data or even somewhere like Gallup’s unemployment polling?
Gallup’s polling data shows that unemployment for March is going to come in around 8.4% NSA (by their polling). That’s down from 9.1% in Feb NSA. Last year the corresponding numbers were 10.3% in Feb. 2011 and 9.9% in March. We shouldn’t see a larger fall in the Gallup numbers (-0.7% Feb to March 2012) compared to last year (-0.4% Feb to March 2011) if your hypothesis is true.
The claims data also doesn’t show a pickup in unemployment; 4 week has been trending downward since the start of the year and even NSA the claims numbers look good.
All indications are that April is going to be another strong jobs report. At least 200k+ SA with the unemployment rate likely ticking down to 8.1-8.2% if the Gallup numbers and claims data are correct.
Oops, I meant March in that last paragraph.
As for April, we’ve now had two consecutive annual slowdowns in the month of April. First was 2010 where the Census blowout and a slowdown in April led to a slowdown entering the second half of the year.
In 2011, a lot of the tsunami aftereffects in April/May (particularly in autos and other vertically integrated industries including Japan’s supply chain) played an effect in the significant slowdown in the jobs market.
That’s why the next 6-8 weeks are so important. If we have another slowdown, it’d create the same hangover effect. But there’s no catalyst for that yet…
Very interesting, Tim! Thanks for putting that together.
Side note: I always thought the July drop in employment was due to schools shutting down. FWIW here in San Diego, the govt sector is the one that always takes the hit in July, which would support my school theory (then again, we don’t have much in the way of auto plants