Tomorrow morning, for at least 10 minutes, CNBC might turn off its Countdown Clock to the Fiscal Cliff long enough to parse the monthly jobs report released by the U.S. Bureau of Labor Statistics.
Alas, those 10 minutes will likely be a gross waste of your time. As Barron's Economic Editor Gene Epstein wrote in his 2006 book Econospinning, "The monthly employment figures give off more false signals than true." After reading that book - which is two-thirds about employment numbers - I usually wait for Epstein's weekend column in Barron's to decipher the hidden gems in the monthly jobs data. To give you a brief review of the flaws inside Friday's job totals, here are a few keys from Epstein's book:
Five Footnotes to Friday's Headline Job Numbers
- Don't Mix Surveys: There are three major monthly job surveys. Yesterday, the private ADP payroll report estimated 118,000 new jobs last month. Also, the BLS conducts two job surveys. (See here for a rundown of their statistical differences). As Epstein explains: "The Establishment Survey counts jobs, not people; the Household Survey counts employed people, not jobs." Historically, their job totals vary widely. As a result of this wide spread in job totals, pundits who want to spin the numbers positively often use the more generous household report, which includes self-employed people, while those who want to spin the numbers more negatively refer to the payroll data.
- Revisions are Huge: The numbers we hear tomorrow are just wild guesses. Most monthly job totals are revised drastically up or down in future months. Epstein cites one initially bullish report of 268,000 new jobs later revised to a decline of 53,000 jobs for a 321,000 negative job swing. In the last two years, job totals have been routinely revised upward by 50,000 or more jobs per month. In last month's October job report (released November 2), the August and September totals were revised up by 84,000 jobs. This is important because stock and bond traders sometimes overreact to the initial Friday "new job" total, although it is just a wild estimate.
- Small Changes are Meaningless: Any change of 0.1% in the unemployment rate is meaningless since small changes fall within a rather large "margin of error" for each of the job surveys. The payroll survey covers over 140,000 establishments. Its margin of error (or in BLS jargon, "size required for statistical significance") is 90,000. The household survey covers 60,000 households, extrapolated to about 150 million laborers, so its current margin of error is a lofty 436,000 jobs. But you won't hear reporters telling us "we gained 115,000 jobs last month, give or take 90,000."
- The "Discouraged Worker" Myth: All you have to do to be a member of the "labor force" is to tell the BLS pollster that you are looking for work. Epstein explains, "A little-known fact is how low the bar is set for 'actively' looking.' All a respondent need do is say yes to having made a single effort to look for a job over the past month. And that single act can literally include sending in one resume or filling in one application or making a phone call to a friend or a relative about a job. Not everyone would agree that such minimal effort constitutes an active job search."
- The Job Creation Myth: When you hear that America "created" a certain number of jobs last month, try adding a decimal point. According to the BLS' Quarterly Census of Employment and Wages (QCEW), the private sector normally creates about 15 million jobs per year, or about 1.25 million per month. The flip side is that we lose 13 million jobs for a net gain of two million. Tens of thousands of Americans are hired each day, while a similar amount quits, is fired, enters retirement, or is otherwise sent packing. In a good year, we will gain two million jobs despite 13 million layoffs, firings, and quits each year. One new job is literally 8 steps forward, 7 steps back.
A related creation myth is that Presidents or Congress can "create" jobs. Even though most serious economists recognize this as a myth, history shows us that the President will take the credit when the employment picture improves and the opposing party will blame him when unemployment increases during his term. That leads us to perhaps the biggest long-term myth of all - how American businesses are exporting jobs.
Looking Forward: A Case Study in How Jobs are Coming Back Home
This election year is mercifully over, but we must have heard the phrase "outsourcing jobs" a thousand times this year. Lou Dobbs has built his revived career on that phrase. He and other populists use this inflammatory rhetoric to imply that there are only a few finite jobs in America and they are being shipped overseas, like a car or a container of widgets. Of course, many major foreign companies - like Japanese carmakers or European pharmaceutical plants - have erected huge factories in America due to our skilled workers and weak dollar, so globalization cuts both ways, but a newer trend is the "insourcing" of jobs.
In the December issue of The Atlantic magazine, Charles Fishman profiled General Electric's* Louisville (Kentucky) Appliance Park as a case study in what he calls the "Insourcing Boom." A few years ago, GE CEO Jeffrey Immelt wanted to unload that rusty old plant, but this year he wrote in the Harvard Business Review that outsourcing is "quickly becoming outdated as a business model" at GE. True to his word, Immelt and GE are now re-opening several of their six Louisville warehouses at a cost of $800 million.
Fishman cites several reasons for the new trend of "insourcing" American jobs from China to the U.S.
- Oil prices are three times what they were in 2000, making cargo-ship fuel much more expensive.
- Due to the latest energy boom, natural gas now costs four times as much in Asia as in the U.S.
- Wages in China are now five times what they were in 2000, while
- American factory workers are accepting competitive pay packages, starting at $13.50 an hour.
- Labor productivity is in a long-term up-trend, making labor costs a smaller slice of product costs.
The recent West Coast port strike gives further warning of our vulnerability to trade disruptions. In short, GE now makes appliances in Kentucky instead of China because material costs went down, labor costs went down, quality went up, and energy efficiency soared. Instead of taking five weeks to reach market - four weeks on the boat from China and one week dockside to clear customs - the Kentucky GE plant now ships appliances to the local home improvement store in 30 minutes and to most other markets in 48 hours.
Trends like this, once begun, gain momentum over the years. Whirlpool is now bringing mixer-making back from China to Ohio. Otis is now making elevators in South Carolina, not Mexico, and even Wham-O is making Frisbees in California, not China. Fishman's conclusion is that "Insourcing solves a whole bundle of problems - it simplifies transportation; it gives people confidence in the competitive security of their ideas; it lets companies manage costs with real transparency and close to home; it means a company can be as nimble as it wants to be because the Pacific Ocean isn't standing in the way…."
Bottom line: We'll likely see much better job statistics in future years - but not necessarily this Friday morning.
Disclosure: I am long GE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.