There's No Lying in Government Statistics: The Labor Market Is Still Down

The quip “There are three kinds of lies: lies, damn lies, and statistics” is variously attributed to Benjamin Disraeli or Mark Twain. What should the public make of government statistics, such as the monthly employment report released today, Thursday, July 2, by the U.S. Bureau of Labor Statistics (BLS)?

There is no lying in US government statistics. But there are always commentators who will use the numbers to make whatever point they want. One should learn enough to be able to interpret the numbers for oneself. That is the only way to prevent being misled.

Of the many numbers contained in the BLS reports, I view three as especially important.

The most salient figure politically is the unemployment rate, which hit 9.5% in June, according to Thursday’s report. This was the highest level since August 1983 and clearly reflects the current extent of distress in American labor markets.

Critics of the official statistics like to point out that the unemployment rate does not capture discouraged workers who have dropped out of the labor force because they couldn’t find a job. True. But the government isn’t trying to make the unemployment number look smaller. Rather, it is just too difficult to decide who is a “discouraged worker,” as opposed to simply being out of the labor force. So the BLS always defines only those who have looked for a job recently as being in the measured labor force. This still allows us to compare changes in unemployment over time, which is the purpose of the unemployment rate.

The second important number in the labor market reports is employment, that is, the number of workers who have jobs, which was down another 467,000 in June. This is the statistic to which the financial markets and macroeconomic forecasters pay the most attention on a monthly basis. (In that sense, the question of discouraged workers is a red herring.) Employment peaked in December 2007, the start of the recession. Since then, we have lost 6 million jobs altogether. The current recession is now both the longest-lasting and the deepest since the 1930s. But at least the period of the steepest rate of job loss – November 2008 to March 2009 – appears to be behind us.

Two details about the jobs number. First, the statisticians get the “employment” number through one method, by surveying establishments (employers), while the unemployment rate uses a measure of employment derived through a different method, by surveying households. The employment number is generally considered more reliable because it is based on a wider survey — another reason to prefer it.

The second point is that, for purposes of comparison across different business cycles, we still need to divide employment by something. If not the labor force, then what? We must, at a minimum, allow for population growth. So it is useful to divide employment by total population. This way we don’t have to attempt distinctions about which Americans might be prepared to take a job under the right circumstances. The fraction of the (civilian non-institutional) population with jobs peaked at the end of the Clinton Administration, exceeding 64% in January 2001. It has now declined below 55%.

Although the financial markets pay most attention to the number of workers with jobs, employment is not much good for forecasting the overall economy, because it tends to be a lagging indicator. Even when firms see economic activity starting to pick up, they delay hiring new workers because it is costly to find, hire, and train new workers – not to mention to fire them again if the recovery turns out abortive. So when demand is rising, firms tend to end furloughs, and if necessary ask workers to work overtime, before they hire new workers.

For this reason, the third indicator is my personal favorite for gauging the business cycle in real time: the rate of change of total hours worked in the economy. Total hours worked is equal to the total number of workers employed, multiplied by the length of the workweek for the average worker. The length of the workweek tends to respond at turning points faster than does the number of jobs. When demand is slowing, firms tend to cut back on overtime, and then switch to part-time workers or in some cases cut workers back to partial workweeks, before they lay them off. The phenomenon is called “labor hoarding.” Conversely, when demand beings to rise, firms tend to increase the workweek, before they hire new workers. (To take two historical examples, the “change in total hours worked” improved in both April 1991 and November 2001, which on other grounds were eventually declared to mark the ends of their respective recessions.)

The workweek reached a historically short level in June: 33.0 hours. Not a good sign. As one consequence, total hours worked fell 0.8% that month, continuing the same rapid deterioration we have seen since last September, the month when Lehman Brothers failed and the recession worsened sharply.

The bottom line for the economy: despite signs in other areas that the recession is leveling out – most importantly, production — the labor market indicators in themselves are not yet signaling a turning point. Thus the June numbers confirm the evaluation I made a month ago that the apparent good news in May employment was probably an insignificant blip. The bottom line for newspaper readers: master your statistics, so that they can’t master you.

Comments

[Mad Hedge F...:]

Great analysis. Ouch! The non-farm payroll came in at minus 467,000. What a spanking! The monthly figure is 100,000 worse than the expectations of most economists, and took the unemployment rate up to 9.5%. There are now 14.5 million unemployed, an all time high, 20 million underemployed, and who knows how many more who have taken pay cuts, unpaid vacations, and furloughs. Commodities got slammed across the board, stocks got trashed, and for a minute I thought they were going to run out of red arrows. Traders shorting the long bond got stopped out of their positions yet again. Looking at the data, it is clear that this is the worst case scenario. Even construction and government jobs, the beneficiaries of so much Federal largess, are still falling. Only employment in education and health care is still rising. This comes on top of yesterday’s disastrous figures showing sales at Chrysler fell 42%, Toyota (TM) 34.6%, General Motors (GMGMQ) 33.6%, and Honda (HMC) 29.5%. At least this will put that annoying “green shoots” crowd out to pasture. The Obama crowd has to be sweating bullets now, having fired their best shot at the enemy, with no apparent impact. Here comes the “L”. Please see my “Sell in May and Go Away” report at Ouch! The non-farm payroll came in at minus 467,000. What a spanking! The monthly figure is 100,000 worse than the expectations of most economists, and took the unemployment rate up to 9.5%. There are now 14.5 million unemployed, an all time high, 20 million underemployed, and who knows how many more who have taken pay cuts, unpaid vacations, and furloughs. Commodities got slammed across the board, stocks got trashed, and for a minute I thought they were going to run out of red arrows. Traders shorting the long bond got stopped out of their positions yet again. Looking at the data, it is clear that this is the worst case scenario. Even construction and government jobs, the beneficiaries of so much Federal largess, are still falling. Only employment in education and health care is still rising. This comes on top of yesterday’s disastrous figures showing sales at Chrysler fell 42%, Toyota (TM) 34.6%, General Motors (GMGMQ) 33.6%, and Honda (HMC) 29.5%. At least this will put that annoying “green shoots” crowd out to pasture. The Obama crowd has to be sweating bullets now, having fired their best shot at the enemy, with no apparent impact. Here comes the “L”. Please see my “Sell in May and Go Away” report at www.madhedgefundtrader.... .

Jul 02 11:11 AM

[conceptwizard:]

Very good explanation of labor. I will keep a closer eye on the total hours worked number from this point on. One point we seem to always miss in the numbers is the people who are either self-employed or working part time and are not eligible for benefits.
I still feel that a better job can be done with a different system to calculate the unemployment numbers more accurately. Its misleading to say that the number is 9.5% when it is as high as 16%.

Jul 02 11:37 AM

[swygert@law...:]

Mr. Frankel, you have given many of us a ray of statistical sunlight in the otherwise murky cloud of unemployment statistics. Thank you for your analysis and insights.

Jul 02 11:58 AM

[steve graves:]

That is without a debt the most informative and concise analysis of the employment report I have yet come across. Hats off, Mr. Frankel.

Jul 02 12:07 PM

[steve graves:]

Must have debt on the brain - meant 'doubt.'

And I would like to ask a question of Mr. Frankel if I may. Would you have to see an actual increase in aggregate weekly hours in order to signal a recovery, or simply a less negative number? I noticed that the average monthly decline since the recession began has been .49% and if we half that time frame (utilizing the more recent half) we see an average monthly decline of .77% - which seems right about where we are now based upon last month's .8% figure. Considering that you predicted that last month's number (a mere .3% decline) was an anomaly, which turned out to be correct:

a.) What did you base that prediction upon, exactly?

b.) Using that same logic, what do you see next?

Jul 02 01:08 PM

[fatcat:]

Good analysis,but with some holes...how does several million illegals or legal temps,who live 5 or 6 to the house and send half of their earnings back to a foreign country,change the equation?They consume very little ,but displace other "discouraged workers"

This was not the case in the 83 recession....so maybe it truly is different this time..

Jul 02 04:25 PM

[Jeff Nielson:]

"There is no lying in US government statistics."

Lol, I stopped reading this rubbish right there.

Jul 02 04:39 PM

[steve graves:]

That's too bad, Jeff. You missed an insightful analysis based upon some fairly intriguing facts, and judging from your usual intelligent commentary I'm guessing you don't generally miss one of those. Had you kept reading you would have quickly grasped Frankel's point that a closer, more thoughtful analysis of statistics helps to summon their real value. He blends statistics with common sense when he points out that during a recession, especially the longest recession since the 1930s, companies will first increase the hours of their existing workforce rather than hire any additional workers. Of course it seems obvious, but when Frankel points out that increases in aggregate weekly hours have coincided with the last two recoveries - granted, you had to read past the title if you hoped to get that far! - you start to realize just how illuminating this particular statistic might actually be. Not exactly a green shoot, but more interesting than most of that self-exuberant blather in this poster's humble opinion...

Jul 02 07:22 PM

[Moon Kil Woong:]

Thanks for some unemployment data gathering explainations. It is always valuable to remind people the source of statistics and what they mean rather than see them as some fundamental statement of absolute fact. The simple fact that adjustments are made to them after the fact should let people know they are not set in stone and have a statistical margin of error.

What was most woorisome in the report I think is the not much talked aboutr deterioration in the service sector. If this ball drops it will be another very bad cycle of unemployment about to happen. Of course, California going bankrupt isn't too positive either. Also, the fact that Fannie Mae and Freddie Mac now represent like 90% of all new loans and no jumbo loans are being written is dangerous because it may mean either they blow up again and/or high end home prices are the next on the list for a real estate nightmare (Commercial real estate is distressing too).

There are a lot of thereatening economic clouds still on the horizon including the fear of eventual stagflation or a depression if the government tries to reverse monetary easing to kill inflation (Even that may be better than stagflation or hyperinflation).

Jul 03 01:19 AM

[John Lounsbury:]

Jeffrey - - -

Excellent article. I have been working on this topic for severaI weeks and have published some thoughts in SA articles and at Real Money. I'll be putting out another piece this weekend. I think the DOL could do a better job of using the data they have on part-time employment. I feel the unemployment rate should better reflect slack in the employment market than it does. You are hitting a very important point about the increase in average hours worked being a much more timely economic indicator than the actual unemployment rate as reported now (and in the past).

As always, this is a timely and penetrating article. Thanks.

Jul 03 10:14 AM

[Joel87:]

Thank you for a very insightful analysis of the unemployment rate.

Jul 03 11:38 PM

[jambo:]

Mr Nielson seems to have missed the tongue in cheek... and sadly a quite informative piece of interpretive analysis.
Putting a finer point on our ability to 'read the stats' can help us going forward, thank you Jeffrey.


On Jul 02 04:39 PM Jeff Nielson wrote:

> "There is no lying in US government statistics."
>
> Lol, I stopped reading this rubbish right there.

Jul 04 03:17 PM

[dragonpaw:]

All statistics that are designed to 'sell you something' are inherently fabrications. Our gov't stats are designed to push the present 'demo-gogue' agenda; Bush stats did the same for the 'republicraps.'
Look for independent numbers that now place real unemployment in the 15-20% range (this would include under-employed people, like bro-in-law; swapping an 80K/year IT position for a psych-tech job at 20K/year) He now has a job with real 'change that he can believe in.'
Hope most statisticians end up with such anomalies in their own stats. Chances that won't happen; there is so much lying out there to do, so little time left in which to do it (notably 2010 elections).

Jul 04 03:48 PM

[Fighting Yoda:]

In addition to the work week, which hit all time low of 33.0 hrs, the diffusion index fell to 28.6 from 31, which means that nearly three-quarters of the corporate sector is still in the process of shedding jobs. Average hourly earnings were unchanged at $18.53, over time decreased. So no chance of hiring in the near future.

Jul 04 06:05 PM

[Market Sniper:]

The major statistical problem with unemployment figures is the birth/death deflator which purports to meaure the "birth and death" of small businesses. While in a growth cycle this measure may actually come very close to what is happening in employment. In the economic contraction phase, it horribly skews the numbers. Shadow stats states that the actual number for June was a bit north of -700,000 jobs and that the deflator under reports approximately 2,500,000 jobs lost in the past twelve months. I am pleased to see the emphasis on rate of change in hours worked as that may give us a better grasp of what is actually happening. Well done.

Jul 04 06:41 PM

[Carlos Lam:]

Jeffrey, great points, particularly on the workweek. I like to look at the overtime figure (which was flat for June) to cross-check it with the workweek hours. Again, this is labor hoarding at work.

Jul 05 04:44 AM

[Arnold Landy:]

While your third indicator, rate of change in total hours worked, was down, the one indicator in that report that is an input into the Leading Economic Indicators: average weekly hours in manufacturing, was up during the month. That, together with the steady decline since April of initial claims for unemployment insurance provides signs of an impending upturn in the economy. (see my articles and Instablog). Have you found that total hours worked is superior to average weekly hours in manufacturing as a leading indicator? Thank you.

Jul 05 03:24 PM

[Jordan Lindsey:]

<There is no lying in US government statistics.>

Then why did the US government not disclose we were in a recession until a full year later when everybody knew it prior?

I cannot believe I just read what you said. US government statistics are always false and manipulated.

Jul 05 04:38 PM

[sethmcs:]

Labor is a cost. A lagging indicator. Bet corporate earnings get better quicker than the unemployment number. With the unemployment rate approaching 10% you can worry less about inflation.

Jul 05 06:16 PM

[TexasBill:]

Mr. Frankel,

Your article got me thinking :

1. You said that "The fraction of the (civilian non-institutional) population with jobs peaked at the end of the Clinton Administration, exceeding 64% in January 2001. It has now declined below 55%. 55%/64% = 86%. Does this not mean that the employment rate has actually declined by 14% since Clinton's time?

2. You also said that: "The workweek reached a historically short level in June: 33.0 hours." Please help me here. If a "normal" workweek is 40 hours, doesn't a 33 hour workweek indicate that the total hours worked has fallen 17.75%? Why isn't this considered the unemployment/underempl... figure?

3. (I know I said two, but ....) Why do these two stats not relate more closely to the actual unemployment numbers put out by the BLS?

Thanks for the thought provoking article.

Jul 06 04:42 PM

[RodgerMitchell:]

If a reporter were to come to his editor with a proposed article titled, “President Obama is gay,” the editor would demand supporting evidence, before that article ever saw daylight.
However, if the same reporter submitted an article titled, “Federal deficit is too high,” history says the editor would ask for no supporting evidence, nor would the article contain any. The media merely assume, as a matter of faith, that revenue neutrality is more prudent than deficits.
Economics is rare, perhaps unique, among sciences, most of which demand evidence for their hypotheses. Only in economics can intuition, faith and popular wisdom obviate facts or even the desire for facts. Thus, I have had editors, columnists and reporters tell me it is “obvious” that large deficits are unsustainable, lead to recessions, depressions, inflations and hyper-inflations. When I ask for evidence to support these views, I seldom hear from them again, probably because they feel scientific evidence is unnecessary in a science, but more importantly, they don’t have any.
Even the Concord Coalition, an organization that for seventeen years, has collected vast amounts of money to preach for federal deficit reduction, unashamedly offers no evidence to support its views. Check its website, concordcoalition.org, or write to them and you will see they neither offer nor have evidence.
Because our leaders parrot the economic beliefs promoted by the media, lack of evidence has contributed heavily to the government actions that yield repeated recessions. Until the media learn to ask, “What is your evidence?” we will continue to suffer periodic, economic traumas. These traumas may seem inevitable and unavoidable, but in reality they are caused by beliefs lacking evidence.

Rodger Malcolm Mitchell
[e-mail]
www.rodgermitchell.com

Jul 29 03:31 PM