The Truth About Friday’s Unemployment Report
FORECASTS & TRENDS E-LETTER
IN THIS ISSUE:
1. Last Friday’s Very Surprising Jobs Report
2. How the Unemployment Report is Compiled
3. Looking at the Internals of the September Report
4. Understanding the Labor Force Participation Rate
5. Takeaways From the September Jobs Report
6. My Thoughts on the First Presidential Debate
Last Friday’s Very Surprising Jobs Report
Last week’s unemployment report for September was not only surprising but also controversial. In August, the headline unemployment rate fell from 8.3% to 8.1% with only 96,000 new non-farm jobs created. The pre-report consensus for last Friday’s report was that the unemployment rate inched up to 8.2% in September with 113,000 new jobs created.
So what did the actual report say? The Bureau of Labor Statistics (BLS) reported that 114,000 new jobs were created in September – no big surprise there. But to everyone’s surprise, the BLS reported that the unemployment rate plunged to 7.8% in one month. That was a shocker, especially given that we’re less than a month from the election!
Immediately after the report’s release, there were howls that the report had been manipulated by the BLS in an effort to get President Obama re-elected, especially in light of his disappointing debate performance last Wednesday night. Always colorful Jack Welch, the retired former CEO of General Electric, tweeted the following just after the report came out:
“Unbelievable jobs numbers. . . these Chicago guys will do anything. . . can’t debate so change numbers.”
Welch implied that the president’s campaign bosses in Chicago had somehow leaned on the BLS to fudge the unemployment number in order to give Obama a boost. Welch’s message was re-sent via Twitter a reported 3,832 times, meaning each of those people re-broadcasted it to their groups of followers, in the first 10 hours after the report. Others joined in this “conspiracy theory” throughout the day on Friday.
So is it possible that the BLS cooked the books to show the unemployment rate plunged from 8.1% to only 7.8% in one month? After all, it was the first time in 44 months that the headline rate was below 8%. Something certainly smells fishy here! I’ll breakdown the numbers for you below. But first a little background on the BLS.
How the Unemployment Report is Compiled
There has long been confusion for many about how the Bureau of Labor Statistics estimates the unemployment rate month after month. I say “estimates” because the number is always revised one month later when the BLS has more complete data.
Here’s how the BLS process works. Each month, federal agencies that are staffed by career civil servants, compile the raw data that eventually become two separate numbers: 1) the unemployment rate; and 2) the total number of jobs added to the economy.
The so-called “Household Survey” is conducted by some 2,200 Census Bureau workers knocking on 60,000 doors and making calls, asking residents if they were employed, or if they were seeking employment, in the last week. Out of 60,000 homes, they typically get about 110,000 adult responses. This survey usually begins in the week that includes the 12th of the month.
The Census Bureau then has 20 days to analyze and complete the survey and then send the results to the BLS, which then has two or three days to provide the numbers to the president’s Council of Economic Advisers (CEA).
At the same time the Census Bureau is doing the Household Survey, the BLS conducts the so-called “Establishment Survey” of businesses by sending questionnaires to 486,000 work sites and compiling the results. The main question that the Establishment Survey seeks to answer is: How many people were on their payrolls on the 12th of the month.
On the Thursday afternoon before the Labor Department’s Friday release of the numbers, the BLS transmits both data sets to the Council of Economic Advisers, over a secure system. It then becomes the CEA chairman’s responsibility to provide the president with the numbers. The final results are often hand-delivered to the West Wing by the CEA chairman. So, the president sees the unemployment report the day before it is released.
Looking at the Internals of the September Report
Again, the headline number was 7.8% unemployment, down from 8.1%, and 114,000 new jobs created versus the pre-report consensus of 113,000. But in the internals (ie – how they arrived at these numbers), we find some interesting and questionable figures. Here is perhaps the most questionable.
The BLS reported that, according to its household survey, total employment rose by 873,000 in September, much of which was due to an increase in part-time work. Some 582,000 Americans reportedly took part-time positions because of slack business conditions or those jobs were the only work they could find.
The obvious question is, how did total employment increase by 873,000 when the BLS reported that new jobs created in September were only 114,000? Remember that the two numbers come from separate surveys. The BLS maintains that the Household Survey itself varies widely from month to month, and that is true. However, the Household Survey has not shown an increase of that magnitude in 29 years! Hmmm…
Oddly enough, it was CNBC that first brought this fact to my attention. This one-month increase in total employment of 873,000 (the largest in 29 years) from the Census Bureau is clearly the most questionable number in last Friday’s unemployment report, especially in this weak economic recovery. At the very least, the timing smells awfully fishy.
The BLS also reported that the number of unemployed persons in the US tumbled by 456,000 in September. That is by far the largest monthly drop so far this year. Based on that large figure, the number of unemployed in the US fell to 12.1 million in September according to the BLS.
Finally, the BLS “U-6” unemployment number, which accounts for the under-employed and those who have given up looking for jobs, held steady at 14.7% in September. No improvement there.
Understanding the Labor Force Participation Rate
President Obama likes to brag that the US economy has created over five million new jobs since he took office, and that is technically true. That number, however, must be considered in the big picture – including data on whether the labor force is expanding or contracting.
The labor force of a country consists of everyone of working age, typically those of age 16 to age 64, who are “participating workers” that are actively employed or seeking employment. People not counted in the labor force include students, retired people, stay-at-home parents, people in prisons or similar institutions and “discouraged workers” who cannot find work and have given up looking.
The “labor force participation rate” is the ratio between the labor force and the overall size of the national population. The labor force participation rate in the US has been declining for the last decade as illustrated in the chart below. The decline has accelerated since 2007. The Labor Department estimates that the overall labor force has declined by apprx. 4 million people.
As of the latest data, only 63.3% of the population is in the workforce. Over the last decade, the labor force participation has declined primarily because of the aging of the population. However, since 2007 the labor participation rate has plunged mainly because jobs have simply disappeared, and more and more Americans have given up looking for work.
In particular, the labor force participation rate in January 2009 when President Obama took office was 65.7%, with a workforce just under 155 million. Since then, the rate has fallen to 63.3% as noted above. Had the rate remained the same, the labor force would be over 160 million today – some five million higher than it currently is. At that labor force level, the unemployment rate today would be around 10.7%.
So when you hear the president boast about creating over five million jobs since he took office, just keep in mind that those new jobs merely replaced an equivalent number of jobs that disappeared since Obama took office.
Takeaways From the September Jobs Report
The September unemployment report was clearly good news for Team Obama, and they wasted no time touting it. However, the same would have been true of Team Romney had the report been worse than expected.
But more importantly, almost everyone agrees that some of the internals in the report are weak overall and offer far less improvement than that represented by the headline number. Most striking is that of the questionable 873,000 in total employment increase, two-thirds of that (582,000) were people who accepted part-time jobs because they were the only jobs they could find. Remember this was the largest monthly increase in 29 years.
As for the 456,000 decline in the number of unemployed, we can only wait until we get the October unemployment report (just days before the elections) and see how much the BLS revises that number, up or down. Either way, most people don’t pay attention to the revisions.
As for the big drop in the headline number of 7.8% (from 8.1%), there is one possible explanation. The BLS revised upward the number of jobs created in July and August by 86,000. This may explain in part why the headline number fell more than expected.
Finally, as to the question of whether the data were manipulated by the BLS or the Census Bureau, I doubt we will ever know for sure. Hopefully, they were not. As noted above, we’ll know a lot more when we see the revisions on November 2.
To end this discussion on an encouraging note regarding any manipulation of the data, let me quote Elaine Chao, US Labor Secretary from 2001 to 2009 (Bush years). She said, “It would be very difficult to manipulate numbers at the BLS.”
Keith Hennessey, Bush’s last director of the National Economic Council, was one of those who received the jobs reports on Thursday nights before their release when he was in government. He said, “Too many people would have to be involved and they couldn’t coordinate that many people lying about the data.”
Actually, I agree that the BLS did not manipulate the numbers. But remember that it was the Census Bureau, not the BLS, that conducted the Household Survey and came up with the eye-popping 873,000 increase in total employment in September, the largest monthly increase in almost three decades. Why is no one questioning the Census Bureau? Think about that.
My Thoughts on the First Presidential Debate
Since I veered lightly into politics with the discussion above on the latest unemployment report, I may as well make a few observations on the presidential debate last Wednesday. Many liberals and even some of the president’s own advisers admitted that President Obama did not perform well in that first debate.
Likewise, some of the president’s own advisers conceded that Romney gave a surprising and commanding performance. Romney was poised, confident, positive, loaded with facts and figures and aggressively took the fight to Obama, while still being respectful.
My main takeaway from the debate, regarding Romney, was that there must have been a good number of “undecided voters” who concluded after the debate: Wow, Romney is nothing like the Obama ads have portrayed him to be. He looked and sounded like a guy who can get the job done. Maybe it’s time for a real change.
The president, on the other hand, looked tired, somewhat uninterested, stared down a lot and did not seem up to the fight. These observations are not just mine – many left-leaning commentators said the same thing, and in some cases even more negative comments. Even the New York Times opined that "He lost his competitive edge."
A CNN poll taken after the debate found the score Romney 67 to Obama 25. It was the most lopsided poll of a presidential debate that CNN has ever conducted, leading many on both sides of the political debate wondering sincerely what happened to President Obama, the great orator. A Gallup poll after the debate had the score Romney 72 to Obama 20, also a record.
There have even been editorials written by Obama supporters questioning whether he really wants a second term. Frankly, I found those condescending and offensive, even though Obama is not my candidate. He desperately wants a second term, no doubt about it.
All sorts of possible explanations were offered for his poor performance, from it was his wedding anniversary to the altitude in the Mile High City, and everything in between. Regardless of the suggested reasons, everyone agreed that the president didn’t bring his “A-Game.”
But my question before and after the debate was/is: Does Obama really have an A-Game, especially without a teleprompter? Despite the president’s reputation as being a world-class orator, and maybe he is with a set speech and a teleprompter, there was not a lot of evidence that he is a great debater. Frankly, it did not take a great debater to beat John McCain in 2008.
I don’t think Obama was terribly bad in the debate. I think he has a very weak case given how weak the economic recovery is, now more than three years into it. Add to that the fact that he cannot really tout his signature accomplishment, ObamaCare, because it is so roundly unpopular.
The president has simply made some poor choices for his priorities (ie – ObamaCare instead of jobs and the economy, stimulus that didn’t work, etc., etc.) and he’s now in a tough position. It is true that he inherited a recession, but his misguided policies have stifled the recovery. Thus, it’s not surprising to me that he didn’t do well in the debate. It remains to be seen if he can change that.
I also wondered beforehand just how seriously the president would take his debate prep. I wondered if he might be so confident in his abilities as a speaker, and so confident in his perceived grasp of the key issues, that he might not spend much time preparing. Post-debate, it was pretty clear that he didn’t prepare nearly well enough.
But for you Obama supporters in my audience (who are probably pondering a nasty e-mail response to this), I have some good news. I will be very surprised if President Obama is not better in the next debate. He’s a smart guy; he will prepare better; and I very much expect that he will be much more aggressive, and will hit Governor Romney with all the negatives we’ve seen in his anti-Romney ads over the summer.
The president has to be careful, though. If he seems too negative against Romney, it could backfire on him. No doubt, it’s a delicate balance, but I will be surprised if President Obama does not perform better in debate #2. Romney, on the other hand, simply has to keep doing what he did in debate #1.
What is clear is that Governor Romney has enjoyed a nice post-debate bounce in the polls. Today’s Rasmussen tracking poll of “likely voters” has the race tied at 48/48. Today’s Pew Research poll has Romney ahead 49/45 for the first time. Romney has also gained ground in all of the swing states as well. We’ll have more details in our election blog tomorrow. You should join us for the final four weeks, if you haven’t already.
In the meantime, we have the VP debate on Thursday night. We will have our gaffe-prone Veep against an admitted policy wonk in Paul Ryan, who will be in his first debate at this level. That debate could be anything from a snoozer to a wild one!
Very best election season regards,
Gary D. Halbert
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