By Rom Badilla, CFA
Last Friday, the Bureau of Labor Statistics revealed that the Unemployment Rate fell to 7.8%, the first reading below eight percent since early 2009. Given the severity of the recession and the lack of robust job growth, a significant drop should ease concerns that the economy is avoiding a slowdown. However, given the details of the report, there is reason to think that the drop may only be temporary, according to Deutsche Bank economist, Joseph LaVorgna.
In the latest Deutsche Bank U.S. Economics Weekly, LaVorgna wrote the following:
The reason for the September drop was both a massive rise in household employment (+873k) and a sharp decline in household unemployment (-456K). The improvement in the former is unusual given that the economy grew only +1.3% in Q2, down from +2.0% in Q1. Real GDP growth probably expanded at only a modestly faster pace last quarter. As we can see from the chart below, real GDP tends to be well correlated with changes in the unemployment rate.
Deutche Bank - Changes in Unemployment Rate & GDP
In other words, a significant drop in the Unemployment Rate usually coincides with robust economic growth. Given recent data of lackluster read GDP growth that suggests otherwise, the fall in the Unemployment Rate appears unusual.
LaVorgna points out that the answer can be found behind the headline numbers and in the Non-Private Industry Household employment component. This component is calculated by taking Household Employment and subtracting out Private Industry Wage and Salary Workers. For September, the Non-Private Industry Household employment rose significantly in September.
The resulting +575k increase in jobs, which is shown in the next chart, is the largest gain since September 2000 (+654k), which was also an Election Year. In the following month, non-private industry employment fell significantly (-382k). Conceivably, the latest record-large jump may also reflect election-related hiring, because the Bureau of Labor Statistics (BLS) does not seasonally adjust the data for elections. The political conventions were very late this year, which would also possibly explain the jump in non-private industry hiring.
Deutche Bank - Non-Private Industry Employment
In addition, job growth was focused in a demographic that can be relatively active in political campaigns.
Furthermore, we have observed a large rise in part-time employment, which arguably hints of the sort of temporary, part-time hiring that is often associated with political campaigns. In addition, we also observed a large +368k increase in employment of 20 to 24 year olds, arguably the demographic most likely to take part working on political campaigns.
Deutche Bank - 20 to 24 Year Old Employment
Keep in mind that this assessment of the labor markets is from 10,000 feet above and cannot be stated with certainty. Suffice to say, we all know that economics can be more of an art than science. The Deutsche Bank economist wrote that market watchers will not know until later if the elections have played a meaningful role in the latest jobs report.
Unfortunately, we will not know to what extent that the election process may have temporarily boosted household employment until next January when we have gotten entirely past the election season and see what (if any) payback in hiring occurs. We estimate that the unemployment rate would have been 8.0% in September if not for the potential statistical distortion we are highlighting.