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Why The Smart Money is Ignoring the Horrible Unemployment Report

January 11, 2011

Are we 6.7% less free than last year? The numbers say yes.

We had a horrible jobs report last Friday.  Absolutely terrible.  Not a bit of good news to be found in the report – every number was weak.  You can find a number of good data rundowns around the web.

I don’t recall seeing any “Silver Lining in the Unemployment report” analysis anywhere.  Anyone writing a report like that would be laughed out of the internets cafe.

But nobody is asking the question that needs to be asked about how this report fits into the big picture, so I will:

How can the U.S. have a string of good economic numbers, but Horrible unemployment numbers?

Look at all of this Good News:

  • Taxes collected are much higher than in 2009
  • Manufacturing: Strong
  • Consumer Spending is holding up
  • Job Opening indicators look strongish (ok not fully strong but better)
  • Corporate Profits at sky-high levels, and likely to put in another strong quarter for Q4
  • Initial Claims falling rapidly

I find it nearly impossible to reconcile these facts with the unemployment numbers. According to the BLS, hours worked has not budged in the last few months, we are creating a pittance of jobs, and earnings are at a standstill. But, according to Treasury, there is this large and consistent positive uptick in the tax information.  The U.S is collecting nearly 7% more in payroll taxes this year than last year.  But payrolls are up marginally, hours worked isn’t growing, and pay is up .1% last month.  How is can these facts be reconciled?

Here is the Answer:

The B/D adjustment missing the turn at the bottom as badly as it missed the turn at the top.

The Birth/Death adjustment for the Unemployment number missed the turn at the beginning of the recession. During 2008, the BLS reported preposterous employment numbers.  The 2008 numbers ended up being massively overstated to the tune of 824,000 jobs.

Red over Yellow, kill a fellow

Ritholtz has written a series of articles about this idea -that the B/D adjustment can swamp any other considerations. Mish had a series of posts about this in 2006, 07, and 08.  The monthly Birth/Death numbers are subject to a large, one time full year revision in February.*

But the tax information is real time and is never adjusted. What we see today is what we get today. It is the actual dollar amount posted to the Treasury account.  Taxes collected are running nearly 7% stronger today than they did last year.  Can we really collect 7% more without some quite positive employment numbers – such as substantial hiring or wage increases?

I fount it hard to reconcile, so I looked for a reason it may not be true.

All of this leads me to believe that the fantasy numbers in Unemployment and jobs we saw during the downward turn in 2007-2008 are returning for a encore presentation – this time understating payrolls instead of overstating them.

I am treating the unemployment numbers out of the BLS as suspect – a discarded outlier. I will change my opinion if the other numbers, like tax collections, begin to weaken.  However, with the other data coming in strong and the known weakness of the B/D model during economic turning points, the current working assumption is that the BLS numbers are understating job creation.

*This is changing to a quarterly adjustment with next months release.

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