Just how dynamic is the US job market? If I told
you we created over 4 million jobs in April, would you believe me? I had a long
conversation with Mohamed El-Erian of PIMCO yesterday. He is openly speculating
that employment may no longer be just a lagging indicator but may also be
predictive. It is an interesting insight, which we will explore as we take a
very deep look at US employment. And I answer a few questions about my thought
that there is a 60% chance for a recession in 2011, and why there is a 40%
chance we won't. What could change those numbers? We explore that and more,
while I suffer from the injustice that LeBron will play with Wade and Bosh.
Where's a nonproliferation treaty when you need it?|
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It's More Than Just Birth/Death
Last week, I wrote about the Birth/Death Adjustment
in the Bureau of Labor Statistics monthly employment numbers. Jeff Miller took
me to task in his blog for not noting that the B/D numbers are not seasonally
adjusted (which I know) and a few other items. I did some research on his work
on employment numbers and came away with a few new thoughts that I think are worth
sharing. Miller (a former professor and a nice guy) and I spent several hours
on the phone talking about the BLS data and what he sees as an unusual
divergence in the data, which I agree is far more interesting than the B/D
To get to the interesting part, I am going to
risk boring you with a few wonkish background paragraphs. First, let's look at
the basic process of how the BLS does its survey. Basically, the BLS tries to
count every job in the US every month. They survey 140,000 businesses and
governments representing about 410,000 worksites each month. It takes a while
to get companies to respond. You get about 60% on the first round, another 20%
the second round, and another 10% the next time. That is why there are
revisions each month to previous data as the BLS gets more accurate info. And
since the revisions represent a significant number of businesses, the direction
of the prior month's data revision is often more important than the current
But that also means that the BLS must make an
estimate concerning the other 10% who did not respond. They more or less assume
that those who didn't respond are statistically like those who did. One of
Miller's points is that this estimated number is far larger than the B/D
It's a Seasonal Thing
The non-seasonally adjusted number for any given
month is a VERY noisy, volatile number. If that number made the headlines it
would cause massive rejoicing or heart attacks each month. Let's look at just
how volatile it is.
First, there are about 130 million employed
people in the US. Every month we get a report called the JOLTS report (the Job
Openings and Labor Turnover survey) on data a few months old, which is mostly
ignored because it is "old" data. Last June 8, we got the data for April. There
were 3.1 million job openings, up from 2.5 million a year ago. 4.3 million
people found jobs and 4 million either voluntarily left or were laid off. In
one month. And that pretty much has been the case every month for the last year
or so, but note that the number on the positive side of the ledger is down a
million from what it was a few years ago. Remember, this is not net job
creations we are talking about, just activity.
On a non-seasonally
adjusted basis, in January 2010 we lost 2.8 million jobs (January is always a
big loser). In April and May we created 1.1 million jobs each month. And then
there were the 1.5 million we lost last July or the 224,000 we gained last
April while we were still in recession. September and October saw a combined 1
million jobs, November was plus 80,000, while December shed 521,000.
Like I said, it's all over the place. One month
you're way up and the next you're way down. Then you could be flat. There is in
fact a seasonality or rhythm to the numbers, but that is way too much detail
for this letter.
So, why does the BLS use the Birth/Death
Assessment? They found out early this decade they were missing new businesses,
so they created the B/D Assessment to try to get closer to the real number.
Nine months (more or less) after the BLS does it
payroll employment number, we get the actual number from the state employment
insurance reports. Since no one will pay unemployment insurance on employees
they don't have, if you add up the number of employees in the program, you come
pretty close to the actual number (again, with some adjustments).
That and other data allow the BLS to adjust the
unemployment numbers to something on the order of pretty darn close. By adding
in their B/D Assessment they have been able to reduce their revisions rather
dramatically. The following chart shows what the revisions would have been
without using the B/D model, and what they are by using it. Clearly the B/D
numbers have been useful in damping down the volatility in the BLS employment
data. Since they started using this number, the average revision has been less
Stay with me. The BLS adds the non-seasonally
adjusted B/D number to the non-seasonally adjusted survey numbers and then
seasonally adjusts the total, so that the number we get each month have a more
And Miller is right about this. The
imputations they must make for non-respondees is far larger than the B/D
Assessment. And in months with large basic survey numbers the difference the
B/D numbers makes is very small. In other months it can have more impact, but
it does smooth out the overall number. I stand corrected.
When you think about it, the fact
that the BLS can survey an economy with 130 million jobs that sees 3% of those
jobs change each month, with tens of millions of new jobs being created and
lost each year and hundreds of thousands of new businesses being created or
dying, and then get within + or - 100,000 jobs with reasonable probability on
their number, is pretty good.
A Breakdown in Communications
Miller tracks job creation and losses from yet
another report, the BED report, which is based on state unemployment insurance
data and is thus accurate, if nine months behind. Let's look at the chart he
Note that even in the worst of the Great
Recession, the US was creating almost 6 million jobs a quarter. It's just that
we were losing over 8 million, so unemployment rose dramatically.
Second, Miller notes that job creation and loss
more or less tracked with each other for the last ten years, until early 2009,
when the relationship simply fell apart. In our discussion, he was curious
about the reason for this. I told him I think the reason is in the next charts
I am going to show you. (You can see his piece on the whole employment issue,
with a lot more detail, at http://oldprof.typepad.com/a_dash_of_insight/2010/06/understanding-the-employment-issue.html.)
Notice the dramatic falloff in bank lending
below. It occurred about the same time as the large differential in the job
loss and gain numbers. Also notice that lending at large banks is down by over
25%, and there seems to be no sign of that improving. Leverage and loans
allowed small and medium-sized businesses to expand. That blood supply has been
cut off, and with it the job creation that comes from business expansion.
Mohamed El-Erian's thought is that employment is
now a leading indicator in the sense that the Fed and other policy makers look
at the employment numbers and adjust their policies going forward, influencing
the economy of the future.
Some Thoughts on Double-Dip
Let me be clear about something. The US economy
should not dip back into recession next year. I certainly think the data tells
us it will slow down as the stimulus starts to go away, but a slow Muddle
Through Economy is not a recession. Double-dip recessions are rare. The last
one we had was in 1980-82, and then it was Volker with his foot on the
inflation brake that caused it.
The reason I think that we could see a double-dip
recession is the rather large tax increases (over 1% of GDP) that will come
beginning in January 2011, coupled with large tax increases or spending cuts at
the state and local levels (also 1% of GDP). We will get to see whether taxes
Now, if Congress decides to delay those tax
increases or stretch them out over a few years, or reduce them, that assessment
could change. Right now, there seems to be little talk about doing that. Stay
Vancouver, New York, Maine, etc.
I fly to Vancouver in two weeks for the Agora
Wealth Symposium and will also do an event with my Canadian partner John Nicola
on the evening of the 20. Then back home for a few weeks before I
fly with my son Trey to New York for a day and then on to our annual fishing gig
in Maine with David Kotok and friends. It looks like CNBC will be covering it
again this year. I will come back to NYC for a day, then it's on to Washington
DC and then Miami and a five-day vacation with good friend Barry Habib in the
Caribbean. Life is good.
I am working furiously on my book, The End
Game. Slowly, it is taking shape. It is a challenge to write a book even a Congressman
And I guess my dismay at LeBron
going to Miami (who I congratulate, as I wish we had those guys here in Dallas!)
is tempered by the announcement a few hours ago that the Texas Rangers signed
Cliff Lee. Finally, a real pitcher to go with our hitting. Maybe this year we
could see a game in October. It's funny, since I moved from the ballpark a few
years back, I have not been back for a game. Looks like I will start to try and
hustle some tickets.
Have a great week. And here's
hoping Mark Cuban can figure out how to sign our own nuclear options to go with
Your just almost having more fun than the law allows
Copyright 2010 John Mauldin. All Rights Reserved
John Mauldin is the President of Millennium Wave Advisors, LLC (MWA) which is an investment advisory firm registered with multiple states. John Mauldin is a registered representative of Millennium Wave Securities, LLC, (MWS) an NASD registered broker-dealer. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB). Millennium Wave Investments is a dba of MWA LLC and MWS LLC. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions.
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