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January Employment Report Preview

 February 01, 2012 10:40 PM


Friday's employment situation report is the big statistical release of the week.  Billions in market cap will swing on speculative conculsions about preliminary survey data.

The question is so important that we insist on making unwarranted inferences.

This month we have a special treat.  We have a timely update on how the BLS is doing with their estimates.  If you (unwisely) choose not to think about the problems in the competing methods, then skip to the conclusion for some data you will not see anywhere else.

The Data

We all want to know whether the economy is improving and, if so, by how much. Employment is the key metric since it is fundamental for consumption, corporate profits, tax revenues, deficit reduction, and financial markets.

[Related -Gold Slides On Perfect Storm For Dollar]

We would like to know the net addition of jobs in the month of January.  This data point is actually a fact, but something that we do not know yet.  Eventually we will have this information with a high degree of certainty.  It takes about eight months.  State employment offices provide data that are used for the benchmarking of the official BLS data. This information is solid, since businesses do not exaggerate employment when it comes to paying taxes.

By the time we have this information, everyone will treat it as "old news." Markets, news sources, and pundits all want to talk about something, and like a spoiled child, they want it RIGHT NOW!

[Related -Forward Guidance Now A Nightmare For Fed.]

To provide an estimate of monthly job changes the BLS has a complex methodology that includes the following steps:

  1. An initial report of a survey of establishments. Even if the survey sample was perfect (and we all know that it is not) and the response rate was 100% (which it is not) the sampling error alone for a 90% confidence interval is +/- 100K jobs.
  2. The report is revised to reflect additional responses over the next two months.
  3. There is an adjustment to account for job creation -- much maligned and misunderstood by nearly everyone.
  4. The final data are benchmarked against the state employment data every year. This usually shows that the overall process was very good, but it led to major downward adjustments at the time of the recession. More recently, the BLS estimates have been too low.

I think the BLS is honest and does a good job, which seems to put me in a small minority of observers. Despite this support, I question the general concept. The BLS tries to estimate total employment in one month, total employment in another, and subtract the two to determine the difference. When you are talking total payroll employment of over 130 million jobs, even small errors are in the range of 100K jobs or more. Meanwhile, smaller discrepancies from expectations are unwisely viewed as significant.


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