Jobs report more noise than signal

As Ed Lazear points out in a very timely op-ed in today's WSJ, "Beware the Monthly Jobs-Report Chatter," the numbers are estimates that:

... are subject to significant revision, they are volatile, and they tell us very little about the direction of the labor market. There are subsequent revisions, one and two months after the first announcement, until the number becomes final, sometimes up to two years later. The error in any given month tends to be very large, which means that its reliability is low.

I have lived through perhaps 300 jobs reports, and I have seen the numbers revised time and again, often by very large amounts. As Ed correctly notes, "... the average error in the initial report is almost as large as average job creation itself."

So today's jobs number "miss" (95K private jobs vs. 200K expected) could well turn out, after revisions are made over the next few months and years, to be not a miss at all. At the very least, we know that one weaker-than-expected jobs report does not a recession make. Are there other signs of a significant slowdown in the economy? None that I can see. In fact, there are many areas of the economy that are growing at decent rates, with no sign of any significant or sudden disruption. Besides, the March shortfall needs to be put in the context of the previous 5 months' worth of private sector job gains which averaged 223K per month. Today's number is most likely just noise. The signal—that jobs continue to grow at a moderate rate—is unchanged.

This first chart shows the monthly change in private sector jobs. Note that the "noise" in this series—the average magnitude of month-to-month variations—can be almost 200K per month. The March number falls well within the range of normal fluctuations.

Taken in the context of the past six months, the annualized growth in jobs is about 2%, the same as it has been on average for the past two years.

The tepid growth in the labor force continues to be the most disappointing aspect of the jobs market. The labor force grew only 0.21% in the past year, and it has grown only 0.24% since the end of 2008. We've never seen anything like this. Upwards of 10 million people have "dropped out" of the jobs market; they've either retired or given up looking for a job. Until we can somehow entice many of these folks to come back to work—by offering more and better job opportunities—the economy is going to be growing at a disappointingly slow pace. The decline in the unemployment rate to 7.6% is a by-product of the very slow grow in the labor force, not a sign of a healthier economy.

This last chart reminds us of the trends that are still likely in place. This recovery has seen a fairly large decline (about 735K) in the number of public sector jobs, but that decline appears to be leveling out. The private sector continues to create jobs at a pace of about 2% per year, or about 190K per month. That combination is enough to give us real growth of 2-3% per year. Not every exciting, but certainly better than a recession.