Yesterday, I had lunch at a Thai restaurant with a classmate of mine from high school. To say this guy is smart would be a massive understatement and do him a great disservice in the process. His brain works in a thousand directions at once, all with an impressive amount of detail.
Our conversation covered everything from technological singularity, zoonosis, biotech stocks with negative enterprise values, to industrial metal music, the war in Ukraine and domestic politics. Then, he asked me about the curious disconnect between the Household and Establishment data sets in the monthly Employment Situation reports.
How can the U.S. economy be adding jobs and losing them at the same time? What’s the real story?
It is fair to say most people don’t ask me about the vagaries between labor market surveys over lunch. Come to think of it, they don’t ask me such things very often at all. That sort of discussion is far too deep in the weeds for most, and for good reason. It is a bit, shall we say, dry.
I told him, as he already knew, the Bureau of Labor Statistics (BLS) collects Household Data by canvassing actual households. Are you currently employed? That sort of thing. By comparison, it calls employers to compile the Establishment Data. How many additional people have you recently hired?
Ideally, these two would move in the same general direction and ultimately converge over time, within a reasonable variance. As I pointed out last month, if this seems like déjà vu all over again, this has recently not been the case. Simply put, the Household and Establishment surveys are painting two different pictures about the health of the U.S. labor markets.
This morning, the BLS released “The Employment Situation – February 2024.” Guess what? It was more of the same. The headline number screamed the economy created 278K net, new payroll jobs last month. Obviously, that is pretty good growth. As you might remember from previous newsletters, the ‘payroll’ number comes from the Establishment Data, the HR Department if you will.
Conversely, the numerous John Does in the Household Data told the BLS that the economy lost 184K jobs last month. Further, due to population growth, an additional 334K were now without work, and the official Unemployment Rate ticked up to 3.9%.
It gets worse.
In November 2023, Table B in the Household survey suggested 161,866K Americans had some measure of employment. In today’s release, this number had fallen to 160,968K. If you don’t have your calculator on you, that is a decrease of 898K, which is NOT insignificant over a 3-month time frame.
Curiously, the Establishment Data suggests the economy added 290K payrolls this past December, another 229K in January and 275K this past month. That is an increase of 794K net, new payroll jobs since the end of November. Hmm. How about that?
So, how can we account for the 1.692 million job differences, over a short 3-month timeframe, between the two surveys in the report? Pray tell me, kind bureaucrat in Washington. I am asking for a friend who asked me the question at a Thai restaurant.
In all seriousness, I told him the BLS will likely gradually revise the payroll numbers downward until they start to gibe with the household information. They don’t have to be the exact same, just close enough. After all, it is the BLS’s report, and it can do pretty much whatever it wants with it. We pretty much have to take its word for it.
This little snippet from the February report sort of sums it up nicely:
“The change in total nonfarm payroll employment for December was revised down by 43,000, from +333,000 to +290,000, and the change for January was revised down by 124,000, from +353,000 to +229,000. With these revisions, employment in December and January combined is 167,000 lower than previously reported. (Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.)”
There you have it. The official explanation how the BLS wiped away 167K jobs in January and February combined. It was a, um, “recalculation of seasonal factors.” Yeah, that’s the ticket. A recalculation of seasonal factors! That’s what it is.
Of course, you could counter the idea that the bureau might increase the number of jobs in the Household Data. It doesn’t have to be ALL revising the payroll numbers down. No argument. It may very well do so, and I would even be surprised if it didn’t. However, the probable case scenario is more reported payrolls vanishing than John Does changing their answers. If you catch my drift.
The reason I say that is the rest of the economic data. Both of the ISM Reports on Business have recently suggested corporate America isn’t adding very many jobs, if any at all. I won’t bore you with the intricacies of those reports. However, I will share this quote from the most recent “NFIB Small Business Jobs Report.”
“Owners’ plans to fill open positions continue to slow, with a seasonally adjusted net 12 percent planning to create new jobs in the next three months, down 2 points from January and the lowest level since May 2020. Job creation plans are now below what would be typical in a strong growth economy.”
Want another tidbit that will put a question mark over your head? Even if you said no, I am going to give it to you anyhow!
In February 2020, the month before the powers that be started shutting down the economy, the Labor Force Participation Rate (LFPR) was 63.3%. That is the percent of eligible Americans who are actively seeking employment. For a number of different reasons, even some of them valid, this rate has fallen to 62.5% as of last month.
IF the LFPR were still 63.3%, using last month’s population and employment data, the Unemployment Rate would be around 5.0%. My math actually came out ever so slightly higher than that. Again, hmm. 5.0% doesn’t give one the warm fuzzies, does it?
Now, I haven’t a clue why the Establishment Data in the Employment Situation report is so much better than most other labor market data sets. Don’t get me wrong. I am not suggesting things are falling about at the seams, and employers are getting ready to throw pink slips from helicopters. After all, businesses would prefer not to have to hire the same worker twice or three times.
However, perhaps peeling back the layers of the proverbial onion like this will help to explain the disconnect between the reported economic data AND the public’s perception of it.
What IF the real Unemployment Rate is closer to 5.0%, but we have to use the BLS’s methodology because it is the best available? What if the economy isn’t really creating 200K jobs every month? What if it actually shedding jobs?
What if the government’s methodology in collecting all of this data has become, for whatever reason, obsolete? That changes in labor and economic conditions are happening so fast, the traditional way for accounting for them has become obsolete? You know, singularity and all of that.
Whew.
In the end, I am perhaps not as cynical as my friend about why the reported data seems so much better than the reality, and I will leave that to your imagination. However, the labor market and inflation reports have been much better than what sentiment polls and my personal observations would suggest.
Yep. That sums up a decent chunk of conversation at lunch yesterday, at a Thai restaurant in central Alabama. While that might sound pretty boring to many, if not most, there wasn’t a single second of dead time.
Have a great weekend.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this any every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
John Norris
Chief Economist
Please note, 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 well as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.