"For now, stick with the non-seasonal numbers when it comes to the BLS employment report
Seasonal adjustments sometimes make an very weak labor market conditions less onerous; this was the case for this week's initial unemployment claims report, and will be for the employment reports in December and January. The statistical seasonal adjustment process doesn’t handle abnormalities in the data very well.
Next week, when the Bureau of Labor Statistics (BLS) releases the December employment report (and for January as well), I suggest following the non-seasonally adjusted data, rather than the seasonally adjusted data. The normal seasonal patterns are not present, and the seasonally adjusted data will paint a slightly more benign picture of the job loss that will be reported in the nonfarm payroll.
An example: seasonal adjustments cannot predict statistical anomalies in unemployment claims report
The Department of Labor released a shockingly strong weekly initial unemployment claims report last Thursday:
The advance seasonally adjusted insured unemployment rate was 3.4 percent for the week ending Dec. 20, an increase of 0.1 percentage point from the prior week's unrevised rate of 3.3 percent. The labor market is improving – at least on a weekly basis, right? Wrong. The insured unemployment rate rose to 3.4% over the week, a signal that the national unemployment – currently at 6.7% - rate will rise.
The weekly claims fell simply because of the statistical process the BLS uses to rid the data of normal seasonal activity. Here is Bloomberg’s take on the report: The number of Americans filing first-time claims for unemployment benefits tumbled last week, skewed by the shortened Christmas workweek, while total jobless rolls reached a 26-year high, signaling a worsening labor market as the economy heads into the second year of a recession. That is incorrect reasoning because Christmas occurred on a workday (Mon. through Fri.) four out of the last five Christmas weeks, which should be (at least partially) accounted for in the seasonal adjustment process( TRUE ). Normally, the statistical process used to compensate for seasonal patterns works quite well. However, this process cannot compensate for anomalies in the data, or strange events that normally do not occur in December.
The chart illustrates the seasonally adjusted and non-seasonally adjusted data since Christmas of 2003, where I highlighted the comparable report for each of the preceding five years. Every year the number of claims filed in the last week of December rises, and on average, the NSA data rises by 75,233.
The seasonal adjustments extract this cyclical pattern (always rises in December) from the data, leaving only the trend that exceeds (or falls short of) the seasonalities. New claims filed beyond what normally happens in December (the seasonal adjustment) signals a weaker-than-normal labor market, while claims filed below what normally happens in December signals a stronger-than-normal labor market.
On December 27, 2008, the NSA number of claims filed rose by just 1,892, which is 73,331 below the average. The seasonal adjustment process sees this as a good thing, and reports a stronger-than-normal labor market, -94,000 new claims filed. But what happened on December 27, 2008 was clearly not normal, as every other indicator signals an contracting labor market.
It is more plausible that a negligible amount of seasonal hiring actually occurred in November and December. Therefore, the last week of December saw very few firings, and a negligible number of initial unemployment claims were filed. Seasonal adjustments would miss such a statistical anomaly.
Beware of the seasonal adjustments in this cycle; this applies to the Bureau of Labor Statistics employment report as well.
The chart illustrates nonfarm payroll since 2004. Like clockwork the seasonal pattern is this: firms hire in October and November for the holiday season; they start firing in December; and then they slash jobs in January.
This year, firms didn't hire in October nor in November - nonfarm payroll fell by 320,000 and 533,000, respectively. Therefore, the seasonal firing pattern through December and January will not exist and the seasonal adjustements will not apply.
In December and January, the seasonal adjusted series will show a stronger labor market than actually exists. Holiday workers will not be fired in December and January because they were never hired in October and November, and the seasonal job loss will be less than the non-seasonal job loss. The non-seasonally adjusted numbers will paint a more accurate picture of the labor market.
Rebecca Wilder"
This is very good advice, but I'm looking at productivity and what I call buying power as well. The Productivity will help determine if I am right about a proactive laying off of workers being a main cause of the loss of jobs, not driven by demand( Fundamentals ), but out of the Fear and Aversion to Risk. The buying power will determine if people who are still employed are, in fact, getting wealthier. This will help the diminution of the Fear and Aversion to Risk going forward.
Posts
6 comments:
Hi Don,
I totally agree with you. The labor contraction is more a function of firms slashing their workforces - clinging to any profits that can be made - rather than workers taking more leisure time (the alternative to work). Wealth is falling, which would encourage new work; marginal tax rates are falling (with falling incomes), which would encourage more work. Furthermore, our production is heavily service rather than manufacturing based - don’t have those unions to get in the way of slashing jobs.
Thanks for the link. Here’s a good one on the subject from Mark Thoma: http://economistsview.typepad.com/economistsview/2008/12/inventory-to-sa.html
Rebecca
p.s. do you have a post explaining your buying power measure?
Rebecca,
I mean real wages have been rising. I take that to mean that if you have a job at which your pay at least remains the same, and prices decline, then you have more buying power. I try, since I'm an average person, to put things in a way that I can relate to and more easily understand, even at the cost of some simplifying. I think that this might, I say might, help with the diminution of the fear and aversion to risk. Tell me if I'm wrong in any way.
Take care,
Don
Hi Don,
If real wages rise, then theoretically people would want to work more because the opportunity cost of not doing so is rising, but I have seen this as being dependent on a person's degree of risk aversion. I am not familiar with the opposite: risk aversion being a function of real wages. Can you point me to something? Is your self-deprecation (I try, since I'm an average person....) something of a joke? I find your reasoning to be quite interesting - although sometimes the articles are a little lengthy.
Thanks, Don. R
R
Rebecca,
Try these posts:
-thelibertariandemocrat.blogspot.com/2008/12/in-last-three-months-real-wages-did-in.html
http://www.guardian.co.uk/commentisfree/cifamerica/2008/dec/22/us-economy-prices-goods
http://don-thelibertariandemocrat.blogspot.com/2008/12/on-annualized-basis-this-works-out-to.html
If prices decline and your wages remain the same, theoretically, you can buy or save more with the same money. You can buy more goods with the same amount of money. It's the opposite of inflation.
It's not a long term solution. It's just a possibility that lower prices will allow some people to realize, over the next few months, that their standard of living has not declined, allowing for some diminution of the fear and aversion to risk.
Also, this:
http://don-thelibertariandemocrat.blogspot.com/2008/12/we-care-more-about-social-comparison.html
I believe that average citizens are more resilient in this crisis than some measures indicate. Consequently, they will be much more likely to move towards a positive stance should the crisis stabilize.
Take care,
Don the Optimist ( because I'm generally not )
Hi Don,
Thanks for the links. But those same people are seeing a massive destruction in household wealth, which is the reason that prices are falling in the first place. Real variables are rising across the board(look at the latest consumption numbers), including real wages, but I don't think that an increasing real wage will make a person any more or less risk averse. Safety is the key now, and even though saving and real wages are rising, it's not necessarily going into equities and housing.
As the uncertainty in the economic environment dissipates, then I think you will see a little less risk aversion. But for now, people are nervous and taking Roubini's advice to keep everything in cash - that's high risk aversion.
Thanks, R
Rebecca,
I agree that is how it seems. I'm trying to posit a few points to test my philosophical views of human action. Basic to my understanding of human action,in any situation, even economic, is an understanding of the underlying presuppositions and context of those actions( In this I follow Austin, Wittgenstein, and Merleau-Ponty. ). Think of how one understands the meaning of a sentence.
In this crisis, I have posited a view points:
1) Government Intervention was expected and relied on by investors. I don't see these people as free market fanatics. Quite the contrary. That's why I keep documenting instances where that is apparent. In this crisis, the lack of explicit government guarantees is the main cause of the crisis( I'm not saying that this good ). That's how I interpret the reaction to Lehman. That doesn't mean that we wouldn't have had problems, but, in my opinion, we didn't need to have a Calling Run, which is what we have had since then.
Given that position, when the government guarantees are believed to be explicit and large enough, or enough money has been invested into government guaranteed investments, investors, who are then sitting upon a large amount of cash and/or having reduced their debt, will reenter the market quickly because they do not want to miss a bottom. This I base upon Bagehot and Graham.
2) Productivity is rising because workers have been proactively let off. This means that Demand is higher than the layoffs warrant, meaning that demand is higher than businesses perceive. This is bad news for employment now, but good news going forward, both because productivity causes wages to rise and we have unmet demand that will require more workers.I base this on Mulligan's research and my own interpretation, which Dean baker has his own version of.
3) Hopefully, the Fed's action, which is too slow for me, will cause Inflation, which will, in the short term, be seen as a sign of recovery. I am following Buiter's and Nick Rowe's views on this, with my own variation.
4)As to housing, perceptions of housing and actual housing prices do not coincide. When the market stabilizes, I believe that people will assume that there house is more than it is actually worth. After all,the wealth effect is based on perception of one's wealth.I have at least one post on this.
5) Detection of Fraud and other malfeasance will help. Many people believe that crime is responsible for this mess, rightly or wrongly, and seeing actual arrests will alleviate doubts about our system. I consider this Burkean.
6) The context of the time. I was alive in 1968. It was much scarier than today. I don't even want to think what I would have felt in 1938. I don't believe that economic crises can be divorced from their times. Therefore, I do not believe that this crisis will end being as bad or seeming as bad as the 30s and 60s and 70s. This is also Austinian.
7) If you support Bush you're not going to like this, but this administration is an important component of our crisis. In this I am following Burke. Lack of faith in government or its justification is a real drag on every aspect of society.
8) Tax cuts aimed at business relief will help, to some extent, with the fear and aversion to risk. Following Graham and James Grant, I believe that recent spreads have been crazy, and, once that dawns upon everyone, there will be money moving into corporate bonds,for instance.
9) A stimulus of tax cuts and government spending will help increase consumption and employment. How much I don't know. I am following Keynes in this, as well as Milton Friedman.
10) Finally for now, soon, the Saver/Export Countries need to make their choice. So far, they have been hedging their bets. However, if they don't continue to hedge, they will either spend more or allow spender countries like ours to default on some debt. The social dislocations in their countries that this crisis could lead to, as of now, dwarf ours.
I'm basically stuck positing these things, like Casey Mulligan with his Supply and Demand model, so I might as well admit it, even though you and others are likely to have the final word.
Take care,
Don
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