Seasonal Adjustments Are B.S. - I Can Handle The Truth On Employment

February 4th, 2013

by Lance Roberts

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The recent release of the January employment figures sent the media and blogosphere abuzz with a wide variety of arguments revolving around seasonal adjustments, birth/death adjustments, household versus survey data and much more. The arguments supporting, and rebuking, the employment numbers are well documented. My friend Doug Short always does a thorough job of analyzing the data as it is presented by the BLS and is worth a read for the broad overview. I am growing weary of having to parse data to strip out various anomalies, adjustments and guesses to divine what the underlying data is really telling me about the economy. As opposed to Jack Nicholson's famous line - when it comes to economic data "I can handle the truth."

For example, while Doug points out that 157,000 jobs were created in January the actual data shows a decline of 2.84 million. This discrepancy is due to the termination of temporary seasonal hires for the holiday shopping season. It happens every year so in order to "smooth" out these seasonal variations the BLS literally adds jobs back, which for the month of January, amounted to the addition of 2.12 million artificial employees. This is simply a raw "guess." However, the torturing of the data does not stop there as the BLS then adds/subtracts an estimate of the number of businesses that were opened, or closed, during the month. This monthly birth/death adjustment, which added 314,000 jobs in January, is a complete guess and is highly subject to bias. When these issues are then combined with other reporting issues, such as not counting individuals that have unemployed longer than 52 weeks even though they can collect unemployment for 99 weeks, the calculation and reporting of the real unemployment picture becomes very cloudy. Where is the truth?

With the system of measuring employment being overly complicated, and subject to a wide degree of interpretation and manipulation, it is not surprising that the monthly reports draw such emotional arguments. In reality what we all want to know is whether employment is getting better or worse? Are businesses hiring people and putting them work at a rate faster than growth of the working age population and what is the trend of employment overall? To do this I suggest we throw out the seasonal adjustments, do away with the birth/death adjustments and just look at the raw data.

As stated above we know that in January there were 2.84 million jobs lost. That is the "truth" and as long as the data is presented with some context it is easily understandable and digestible. The chart below provides the context of the January job loss in relation to all previous January's going back to 1999. These job losses occur every January as part-time holiday retail sales jobs are eliminated and, as you can see, 2.5 million job losses in January is quite the norm. Now, the news of 2.84 million jobs lost is not quite so "shocking."

The reverse occurs in months such as October which consistently show large increases in job creation as businesses begin to ramp up for the holiday season.

Therefore, by using a simple 12-month average of the non-seasonally adjusted employment data, excluding all seasonal or birth/death adjustments, we can achieve a clearer picture about the real state of employment and the economy. Of course, the immediate question is how does it compare to the data that is released to the BLS? I have included that data as well which shows there is not a great deal of variation between the two methods.

What is immediately noticeable when analyzing the data in this manner is that it appears that employment may have peaked for this current economic cycle. This is not surprising considering that this recovery is four years old and pushing the outer bounds of historical economic cycles.

However, using the raw data let's analyze the January employment situation:

As we already know there were 2.84 million jobs lost in January following a decline of 91,000 In December.

The average number of jobs created each month during 2012 was 187,800. This is above the average employment growth of 174,400 in 2011.

For 2012 the average rate of employment growth was below the 313,000 average increase in the working age population 16-years and older.

The last bit of information explains why the employment-to-population ratio, and labor force participation rates, has not improved since the recessionary lows. This is more clearly evident when looking at the number of full-time employees (which are required to have a healthy consumption based economy) relative to the population.

The dashed line in the chart above is jobless claims on an inverted scale. What we can be surmised from this analysis is that jobless claims are not necessarily falling due to companies ramping up hiring but rather an exhaustion of layoffs and terminations.

Of course, the issue of the real state of unemployment goes back to our previous discussion on this topic which adjusts for the number of individuals that have been unemployed for longer than 52 weeks. The chart below is the official U-6 rate as published by the BLS plus the addition of those individuals that have been unemployed for longer than 52-weeks.

As stated above, excluded individuals from the unemployment count after 52-weeks while they are on 99 weeks of unemployment support, obfuscates the actual levels of domestic unemployment. While it is clear that the real number of unemployed individuals has improved since the depths of the last recession - the rate still remains at levels that impede a return to organic economic growth.

In the end what we all really want to know is the "truth." Is the current overall employment picture improving - the unadjusted data says "yes." However, what is happening with employment across the country hardly shows a resurgence of underlying economic strength. It is time to get rid of seasonal adjustments and use a simpler analytical process instead. After all, if you are like me, we can handle the "truth" and are likely to make better decisions because of it.

Originally posted at Lance's blog: streettalklive

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