If you don’t like politics, you are really going to hate the next several months and absolutely loathe October. With the run-up to the election and the Supreme Court nomination process, it is going to get ugly, probably really ugly. My friends, that is the safest prediction I have made in my career. Insightful? Not in the slightest. Accurate? Very much. For one, I am not looking forward to the next several weeks.
After all, everything today is contentious or could be so. Right? It isn’t just politics. There seems to be no middle ground on any topic. You are either right or you are a fool. Worse than that, you might even be amoral if you don’t agree with the group, truly evil. There is only my side to the story. I would rather yell at you than listen to you. If you don’t like it, then get the [heck] out. The only truth is that which fits my narrative, not yours, because yours is completely without merit.
Frankly, I find this all very exhausting, and I am tired of it (pun intended. If you think it is the ‘other side’ that has or is the problem, they think the same about you.
So, let me discuss something today which shouldn’t be terribly controversial, innocuous even: The Employment Situation – September 2020.
This morning, the Bureau of Labor Statistics reported the US economy added a net, new 661K ‘nonfarm payroll jobs.’ While a very large number, it was well less than the median analysts’ estimate of 859K in the Bloomberg survey. That is a pretty substantial miss, so the report must have been bad. Right? If the headline is the only thing that matters, sure. However, it isn’t.
In fact, it was an okay report, but not great.
The reason for the discrepancy between the estimate and the reality is on the next to last line of Table B-1 in the report: ‘Local government, education.’ It seems this segment of the workforce shed an eye-opening 231.1K positions. Holy smokes. That is a huge number in this series. What gives?
Well, this is the way the process works, from the Technical Note page in the release:
“The establishment survey provides information on employment, hours, and earnings of employees on nonfarm payrolls; the data appear in the “B” tables, marked ESTABLISHMENT DATA. BLS collects these data each month from the payroll records of a sample of nonagricultural business establishments. Each month the CES program surveys about 145,000 businesses and government agencies, representing approximately 697,000 individual worksites, in order to provide detailed industry data on employment, hours, and earnings of workers on nonfarm payrolls. The active sample includes approximately one-third of all nonfarm payroll jobs.
For both surveys, the data for a given month relate to a particular week or pay period. In the household survey, the reference period is generally the calendar week that contains the 12th day of the month. In the establishment survey, the reference period is the pay period including the 12th, which may or may not correspond directly to the calendar week.”
Here is the drill: how many people were working at one of the 145,000 entities in the survey (assuming they all responded) during the pay period that included the 12th day of the month? Job gains and losses after 12th? They don’t count…at least not this month, which is why we have ‘revisions’ every month. Where the rubber meets the road, these numbers are nothing more than estimates, just estimates.
But why is this explanation important? Well, it is important because most schools, with which I am aware, haven’t fully reopened. By reopen, I mean full-time staff, full-time students, and business as usual. This includes all athletic programs, the cafeteria and janitorial staffs, etc. Further, these numbers are what they call ‘seasonally adjusted.’ Here is what the survey has to say about the normal seasonal adjustment to education:
“Similarly, in the establishment survey, payroll employment in education declines by about 20 percent at the end of the spring term and later rises with the start of the fall term, obscuring the underlying employment trends in the industry. Because seasonal employment changes at the end and beginning of the school year can be estimated, the statistics can be adjusted to make underlying employment patterns more discernable.”
In so words, the BLS ‘smooths’ out the job losses in the Spring and the job gains in the Fall to present a more even employment picture. Since many schools have postponed or staggered their reopening, the number of jobs in this sector have undoubtedly been less than normal for September. Due to the seasonally adjustment process, this would look like a job loss for the past month, if that makes sense.
What? Okay, here is a bad way of explaining it. Imagine a school system has 500 ‘part-time’ positions. They start at the beginning of the school year and terminate at the end. This year, those 500 jobs ended back in May; however, let’s assume the system had called back only 400 by September 12. As a result, there were technically 100 job losses during the month, even as the system actually added 400 jobs. I hope that makes sense.
While not completely accurate, it is more than enough for cocktail party conversation, assuming you attend social events and discuss the seasonal adjustment factors the BLS uses in its employment surveys. Hey, I might do this for a living, but I think I might take a raincheck on that soiree. Scratch the word think; I will.
So, the problem with the jobs report this morning, if you can call it that? The hesitancy in completely reopening schools this Fall has had an outsized effect on the seasonal adjustment factors in the survey. This should remedy itself as schools complete the reopening process. The sooner large jurisdictions get the schools open, the sooner the survey will correct itself. The same can be said for a number of sectors with some form of seasonal employment. For some reason, in writing that last sentence, I thought of Hickory Farms, Omaha Steaks, and See’s Candies. For grins, the good folks at See’s have an estimated 1,500 year-round employees, and another 6,000+ seasonal associates. What happens if See’s only adds 4,000 this holiday season? That’s right; it is technically a job loss for the month.
How has this been for boring? Well, I got more for you.
In the report, the BLS also announced the official Unemployment Rate fell from 8.4% in August to 7.9% in September. ‘Wall Street’ had been looking for an 8.2%. So, that has to be good, right? Well, it is better than a sharp stick in the eye, as most things are. However, it is just math: how many people (in another survey) reported having a job in September divided by the number of people actively participating in the workforce? Obviously, this is the percent of folks who are employed. Subtract that number from 100%, and, voila, there is your Unemployment Rate.
Last month, this other survey (the Household Survey) suggested there were an additional 275K employed Americans in September than there were in August. However, it seems there were 970K fewer people participating in the workforce. As a result, the numerator in this division equation shrank pretty substantially, resulting in a higher percent of people working and, therefore, a lower Unemployment Rate.
Had the labor force remained constant in September, the Unemployment Rate would have been…drum roll please…8.2%. Say, isn’t that what the so-called experts had been expecting? That’s right, it was.
As a result, you could reasonably argue the following: 1) the payroll jobs number was better than the headlines suggest, and; 2) the Unemployment Rate wasn’t as good as the headlines suggest. If that is indeed the case, perhaps this morning’s report was, shall we say, mediocre…neither fish nor fowl for either the bulls or the bears.
Yeah, I am okay with that, and I am glad I am. If I weren’t okay with it, my own argument, I would have some serious schizophrenic or multi-personality disorder tendencies. My friend William would know the difference, but I don’t think he reads this with any regularity.
In the end, there you have it: hopefully, a completely inoffensive analysis of an economic release. If you felt it was boring to read, you can only imagine how it was to write. However, after this week…this…this crazy week, I thought you might like the equivalent of a lukewarm glass of water. If not, and you have continued reading to this point, getting angrier with each sentence, I would have to ask you why you did so. Heck, I might even suggest a new hobby…but promise me it won’t be politics. I mean if THIS gets you worked up, brother, the next 4 weeks are going to be a real problem.
Take care, and I hope everyone has a great weekend.
As always, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee, are subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the reset of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.