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Sunday, December 16, 2007

Labor market numbers are not credible

It has been a theme of ours that the numbers coming out of the Bush administration do not reflect life on the ground for Americans, particularly the 20% of consumers occupying the bottom half of the population.

The November job numbers came out last week, demonstrating a growth of a much trumpeted 94,000 payroll jobs. This was accompanied by adjectives such as "solid," strong," sometimes "surprisingly strong or solid," and at least "better than expected."

94,000 when the economy needs 150,000 just to tread water is better labeled "tepid" or "weak" and at BEST "better than expected."

But 94,000 jobs were not created.

Dismay has been voiced by, among others, Paul Kasriel, chief economist at the Northern Trust Company of Chicago, who points out that 76 percent of all job growth over the past twelve months has been found in the so-called Birth Death adjustment which attempts to account for 1-5 person businesses going in and out of existence. This corresponds to 36 percent of job growth from these sources in the previous 12-month period.

Similar distrust has been voiced for some time by Michael Shedlock, or Mish, whose blog Mish's Global Economic Trend Analysis is one of the best observers of current economics on the web or anywhere.
For 9 consecutive months the BLS assumed that new unaccounted construction businesses were created in this environment where business spending has been weak, housing has been horrid, and close to 200 lenders have gone out of business or stopped writing loans according to Implode-O-Meter. There is still a lot of catching up to do on those construction assumptions. Eventually we will see higher negative revisions in the months to come. However, I am still struggling with 11 consecutive months of birth death additions to financial services in light of imploded lending. Even though "imploded" does not imply out of business, the number of small 1-5 person shops that have ceased doing mortgage related business has to be staggering. Those numbers are not reflected in Implode-O-Meter stats or in the birth/death model revisions. All things considered, the Birth Death revisions continue to remain in Bizarro World with the model adding 1,239,000 jobs to the economy since February. I do not believe it and neither does the treasury market.
Then we add the commentary. Job growth has been "trending up." Oops, watch the language "Nonfarm payroll employment continued to trend up." If "trend up" means the number got bigger, that is possibly true. As above, possibly not. But if "trend up" means growth is improving, that is demonstrably false.

An EPI report put out on the same day as the BLS numbers demonstrates that growth -- even by official numbers is trending down from over 2 percent in February 06 to 1.4 percent in March 07 and now to approaching 1 percent in November 07. Private payroll growth has trended down even more sharply and is nowless than half its March '06 level.

Underlying this discussion is the question, not of transparency, but of veracity. Clearly the statistical arms of the government are clearing their verbiage with the political arms. The question is whether they are manufacturing the numbers. Private market and public policy analysts have no alternative to official federal numbers. We cannot turn to another provider. Our only choice is to believe or not to believe.

We have seen this administration play fast and loose with national security intelligence to sway public opinion. If the same spin is being applied to the economy, the results could be very bad.

Not being able to believe the data coming out of the BLS and BEA is similar to not being able to believe the accounts of a private corporation. The lost of trust can be an enormous downside risk.