Jumat, 05 Oktober 2012

The drop in the unemployment rate overstates the improvement in the economy

September private sector job gains, according to the establishment survey, were a bit weaker than expected (104K vs. 130K), and they have only increased at a very modest 1.1% annualized rate over the past six months, which is a lot slower than there 1.7% gain over the past year. According to this number, the economy is growing slowly and even slowing down some. But the unemployment rate fell unexpectedly to 7.8%—which is quite counterintuitive. For conspiracy theorists this is too good to be true, because it also happens to be exactly the rate during the month that Obama assumed the presidency.

I'm not one for conspiracy theories, but I note that the household survey, which is used to calculate the unemployment rate, showed a very large 660K increase in private sector jobs in September, most of which were part-time jobs. As the chart above shows, the household survey is much more volatile, on a month-to-month basis, than the establishment survey, and it has been unusually volatile this year. (There are several reasons for this, including faulty seasonal adjustment factor.) There are times, like now, when you just can't take the results of the household survey at face value; it's very unlikely that the economy suddenly and dramatically improved last month. Whether the numbers are fudged or not, you have to discount the household survey's figures substantially.

I've learned that one good approach to interpreting these two widely varying data series is to split the difference between them over some reasonable period. They don't track each other very closely from month to month, but over time they usually agree. So: since the end of January, 2010, when both surveys showed employment hitting a post-recession low, the two surveys have recorded the addition of approximately the same number of private sector jobs: 4.9 million according to the household survey, and 4.7 million according to the establishment survey. That works out to about 150K per month. That's OK, but it's far below what is needed if the economy is to get back on track. We need about 120K per month just to keep up with population growth. The jobs growth we have had in recent years is consistent with the unusually slow recovery that we've had. Most of the decline in the unemployment rate is due to a large number (5 million or more) of people dropping out of the labor force. You can see that in the chart below.

I end up seeing not much change in the economy as a result of these two reports. The economy is creating a modest number of jobs each month, but it is nothing to get excited about. It's likely that the strong growth in part-time employment that we see of late in the household survey is a by-product of the substantial decline in the number of people receiving unemployment compensation this year. As I've mentioned before, once their unemployment benefits expire, as they have for over 1.2 million this past year, people have an added incentive to find and accept a job, even if it pays little and even if it is part-time. It's good that they are working, but that means the jobs numbers are most likely overstating the effective improvement in the economy.

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