Tuesday, October 16, 2012

The Day the Data Died.

Be careful what you say.

After hearing the employment report for September, some of the words of Don McLean’s “American Pie” came to me in a slightly altered form.  This blog has only sparingly discussed employment reports.  The reason is quite simple and is summarized in the e-mail exchange mentioned below.
A former state treasurer forwarded the e-mail with this comment:  “[a friend of his] thinks the 7.8 is proof things are getting better. You may enjoy my reply, and perhaps use the explanation in your blog.”  His reply is shown below:

On Oct 7, 2012 11:15 AM, ….he wrote: 

“The number is Obama's sound and fury... CNN should have told you that... the number is meaningless.
Last night I went to sleep at 190 pounds. This morning I woke up at 189. Proof that my diet is working, or is it all sound and fury so I can have a donut for breakfast?” 

One doesn't even need to address the content of the employment report to realize that his response is correct.  The unemployment rate is much quoted, despite being the most meaningless statistic in the employment report.

That said, the unemployment rate isn't totally meaningless, but it can only be interpreted in the context of the other content of the total report.  Other data from the employer survey, including the change in employment, the change in hours worked, the wage changes reported, and the industry composition of the employment change, are far more important than anything resulting from the household survey. 
Looking just at the household survey, the unemployment figure is much less important than changes in the labor force participation rate, or for that matter, the number of people identifying themselves as employed.  Further, the household survey does not result in just an unemployment rate.  The unemployment rate is estimated in a number of ways.  Other than the so-called “headline number,” the most widely quoted number is the total unemployed and underemployed.  That is shown both as a number and as a rate.  Consistency within the household survey is an important criterion for judging how to interpret a headline unemployment rate.
However, there is one other result than can be derived from the combined employer survey and household survey.  In various postings The Hedged Economist has alluded to the fact that at some point in the recovery, the household survey should start providing employment growth numbers that seem inconsistent with the numbers generated from the employer survey.  The usual response at that point is to question the household survey.  That's exactly what is happening now.

The July 31, 2010 posting entitled “Unemployment map: The geography of a recession” recommended:
“My suggestion is ignore the unemployment rate and focus on the change in employment if you want to measure how an economy is doing. Notice the term was employment; not jobs. It is the failure to realize that employment and jobs aren't synonymous that is the Achilles heel of this recovery.”

This blog’s posting on August 4, 2010 in a posting defending an employment report entitled “An article about a fiction and the employment report,” discussed the issue when it was the employer survey that was being questioned.  At that point, someone was pointing to the employer survey which showed employment gains that were clearly not sustainable given the total employment report and the administrations claims that the recovery was gaining steam. The comment at that time was:
“Problem is he never bothers to show whether ‘companies continued to slash jobs and hold off hiring for months, even years, after profits returned’ is anything new. It’s not. Recoveries don’t come from having the same set of employers hire back people. Recoveries have always come mainly from new or different companies hiring. Interestingly, it tends to be smaller companies and often start-ups from the current or the last cycle….”
The posting went on to note that any talk of economic recovery at that point was extremely premature.  It stated:
“The picture isn’t pretty. The evidence that the needed churn isn’t happening is there. In addition to the behavior of the two different measures of employment, Friday’s report included other data with telling implications: namely, the revisions. The BLS is aware of the limitation of the employer survey (i.e., not adequately representing new and small businesses). It tries to adjust the data to correct for the undercount using what is called the business birth-death model. That adjustment has its primary impact on the last few months of data. The data is then revised when better, some would say real, data become available. Those were the months for which the employment data were revised down. The unavoidable implication is that fewer jobs are being created by new and small business than they expected. This absence of churn among employers deserves more attention.”

The September employment report gives every indication that the policy failures that were the reason the August 2010 report didn't signal the beginning of employment recovery are becoming less important. But, as economists are fond of saying," the recovery is quite fragile."  Put differently, the private sector has healed and is recovering and has reached a point where that recovery could easily become self-sustaining.  What is infinitely apparent is that there are new headwinds, or, I should say, a continuation of the headwinds that undermined the recovery in 2010.  One doesn't have to be a strong partisan to realize that the Obama administration has been anything but friendly to small business.

That said, judging just from the employment report, the recovery is continuing its anemic pace and is poised to accelerate.  That, however, is not a forecast.  This administration has repeatedly undermined the recovery.  To illustrate, if the data could be accepted at face value the employment report itself would quicken the pace of recovery.
It should be pointed out that the suspicion reflected in that last statement is not the normal posture of The Hedged Economist.  My normal posture is reflected in a January 5, 2011 posting entitled “Reality and the jobs numbers.”  It states my normal response to charges of intentional misrepresentation in the employment numbers:

“For those who see political conspiracies everywhere it is interesting to note that the undercount in December coincided with the hearings on extending the 99 week emergency unemployment benefits. I’m amused by the conspiracy theorists. They seem to be part of a massive delusion that government is always in control of its every activity right down to the details. I hate to pop anyone’s bubble, but governments make mistakes. It’s very likely someone just got the number wrong. That they were out of touch with the private economy around them shouldn’t be surprising: they’re government employees after all....This month the news in the employment report released on Friday will be in the sector detail and the household survey.”
That quote should make it quite apparent that in most instances, the best approach is to dismiss such charges as just political rhetoric.  It is, however, interesting how frequently they have arisen during this administration, especially given how inconsistent the employment recovery has been.  That in of itself would not be enough to justify questioning the number.  However, this administration has made it clear by its own statements that it considers generating phony government statistics a legitimate campaign tactic.  That justification comes from none other than Austan Goolsbee, former chairman of the Obama administration's Council of Economic Advisers. Back in 2003, Mr. Goolsbee himself, commenting on a Bush-era unemployment figure, wrote in a New York Times op-ed: "the government has cooked the books."  Clearly, he thinks cooking the books is a campaign tactic.

Even this administration's willingness to admit that it views fudging the numbers as a legitimate campaign tactic is not enough reason to dismiss the good news contained in the employment report.  This is especially true given that inconsistencies between the employer survey and the household survey are a cyclical phenomenon.  The more troubling problem with the employment report is the inconsistency within the household survey.  For the drop in the unemployment rate to represent the positive news on employment growth that will occur at some point during the recovery, it needs to be accompanied by a similar drop in the combined unemployed and underemployed.  It also should have been preceded, as opposed to accompanied by, an increase in the labor force participation rate.

The bottom line, however, is that the employment report can contain data that is just wrong.  It's much easier for one month’s report to contain a number that is wrong than for the report to show a false trend.  Thus, next month’s report will eliminate the ambiguity introduced to the interpretation of this month’s employment report.
It's worth noting in passing that accusations of cooking the books did not originate with Goolsbee's charges in 2003.   They played an important part in Clinton's ability to convince the public that we were not recovering from the recession during his campaign against the first President Bush.  In that instance, after the election the data confirmed that we were in fact recovering.  In this current instance, there is still another employment report before the election.

Thus, the report for October employment needs to confirm this report for September.  A perfectly logical question to ask is what would constitute confirmation.  Clearly, another drop in the unemployment rate without confirming data will only confirm that the administration is cooking the books.  Confirmation should come in the form of a pickup in employment in the employer survey, a reduction in the rate of combined unemployment and underemployment, and revision to this and previous month’s anemic showing in the employer survey.  Of less importance, but also telling, is whether the increases in employment in the employer survey disperses to include more industries.
Bottom line, Jack Welsh’s comments were justified.  The September employment numbers warrant questioning.  Whether they were fudged isn't a political question.  It is question of fact that will be proven over the next few employment reports.  It will be proven, regardless of who wins the election, and woe be to the incumbent if, in fact, they were fudged.  Perhaps the administration will be able to find someone to blame for the error.  Even if they do, the number of people they can fool will decrease.  They'll be undermining their party by their obvious ducking of responsibility for the data their administration generates.

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