May 2019 BLS Jobs Situation - Jobs Growth Not So Good

The headline seasonally adjusted BLS job growth was well below expectations.

Analyst Opinion of the BLS Employment Situation

The establishment and household surveys reasonably correlated. This was a poor jobs report and well under expectations. Jobs growth in 2019 is 397,000 people below the pace of last year. Jobs growth to-date is the worst since 2016. The trends clearly show a deteriorating employment picture. Clearly the Federal Reserves continued statements about an improving jobs situation is bogus.

The economically intuitive sectors were positive.

• The year-over-year rate of growth for employment significantly decelerated this month (red line on the graph below). The year-over-year growth rate is below the rate of growth one year ago. This is a year-over-year analysis which has no seasonality issues.

• Economic intuitive sectors of employment were positive
• This month's report internals (comparing household to establishment data sets) reasonably correlated with the household survey showing seasonally adjusted employment falling 113,000 vs the headline establishment number expanding 75,000. The point here is that part of the headlines are from the household survey (such as the unemployment rate) and part is from the establishment survey (job growth). From a survey control point of view - the common element is jobs growth - and if they do not match, your confidence in either survey is diminished. [note that the household survey includes ALL jobs growth, not just non-farm).
• The household survey added 176,000 people to the labor force.
• The National Federation of Independent Business (NFIB)'s monthly Jobs Report is at the end of this post.

A summary of the employment situation:

• BLS reported: 75K (non-farm) and 90K (non-farm private). The headline unemployment rate was unchanged at 3.6 %.
• ADP reported: 27K (non-farm private)
• In Econintersect's May 2019 economic forecast released in late April, we estimated non-farm private payroll growth at 180,000 (based on economic potential) and 200,000 (fudged based on current overrun / under-run of economic potential).
• The market expected (from Econoday):

The BLS reports seasonally adjusted data - manipulated with multiple seasonal adjustment factors, and Econintersect believes the unadjusted data gives a clearer picture of the jobs situation.

Non-seasonally adjusted non-farm payrolls improved 778,000 - worst since 2016 and below the average for the last 10 years. The following chart compares the jobs gains this month with the same month historically:

Year-to-date unadjusted employment growth is 397,000 people below the pace of last year.

 

The last month's headline employment gains were reduced significantly. Generally speaking, the INITIAL employment gain estimate is overstated when the economy is slowing and understated when the economy is accelerating.

Most of the analysis below uses unadjusted data and presents an alternative view to the headline data.

Unemployment

The BLS reported U-3 (headline) unemployment was 3.6 % with the U-6 "all in" unemployment rate (including those working part-time who want a full-time job) improved from 7.3 % to 7.1 %. These numbers are volatile as they are created from the household survey.

BLS U-3 Headline Unemployment (red line, left axis), U-6 All In Unemployment (blue line, left axis), and Median Duration of Unemployment (green line, right axis)

Econintersect has an interpretation of employment supply slack using the BLS employment-population ratio, demonstrated by the graph below. The employment-population ratio was unchanged at 60.6.

Employment-Population Ratio

The jobs picture - when the employment/population as a whole - has been on an uptrend since mid-2011. This ratio is determined by the household survey.

• Econintersect uses employment-population ratios to monitor the jobless situation. The headline unemployment number requires the BLS to guess at the size of the workforce, then guess again who is employed or not employed. In employment-population ratios, the population is a given and the guess is who is employed.
• This ratio has been in a general uptrend since the beginning of 2014. The employment-population ratio tells you the percent of the population with a job. Each 0.1 % increment represents approximately 300,000 jobs. [Note: these are seasonally adjusted numbers - and we are relying on the BLS to get this seasonal adjustment factor correct]. An unchanged ratio would be telling you that jobs growth was around 150,000 - as this is approximately the new entries to the labor market caused by population growth.
• The growth in employment since the Great Recession has been in full-time jobs.

 

Employment Metrics

The growth trend in the establishment survey's non-farm payroll year-over-year growth rate was trending up in 2018. Year-over-year growth rate declined this month.

Unadjusted Non-Farm Payrolls Year-over-Year Growth

Another way to view employment is to watch the total hours worked where trends vary based on periods selected.

Percent Change Year-over-Year Non-Farm Private Weekly Hours Worked

The bullets below use seasonally adjusted data from the establishment survey except where indicated:

• Average hours worked (table B-2) was unchanged at 34.4. A rising number normally indicates an expanding economy.
• Government employment fell 15,000 (15K) with the Federal Government up 4K, state governments down 10K and local governments down 9K.
• The big contributors to employment growth this month was health care/social services (24K) and Administrative and support services (21.3K),
• Manufacturing employment grew 3K, and construction grew 4K.
• The unemployment rate (from the household survey) for people between 20 and 24 (Table A-10) worsened from 6.5 % to 7.0 %. This number is produced by a survey and is very volatile.
• Average hourly earnings (Table B-3) was up $0.06 to $27.83

Private Employment: Average Hourly Earnings

Economic Metrics

Economic markers used to benchmark economic growth (all from the establishment survey).

The truck employment was up 0.3K.

Truck Transport Employment - Year-over-Year Change

Temporary help was up 5.1K.

Temporary Help Employment - Year-over-Year Change

Econintersect believes the transport sector is a forward indicator. Others look at temporary help as a forward indicator.

Food for Thought

Who are the victims in this employment situation? It is not people over 55.

Index of Employment Levels - 55 and up (blue line), 45 to 54 (red line), 35 to 44 (green line), 25 to 34 (purple line), 20 to 24 (light blue line), and 16 to 19 (orange line)

Women are doing better than men.

Index of Employment Levels - Men (blue line) vs Women (red line)

Mom and Pop employment remains historically low.

The less education one has the less chance of finding a job.

Index of Employment Levels - University graduate (blue line), Some college or AA degree (orange line), high school graduates (green line), and high school dropouts (red line)

Here is an indexed view of employment levels.

Index of Employment Levels (from the BLS Establishment Survey) - Hispanic (blue line), African American (red line), and White (green line)

However, keep in mind that population growth is different for each group. Here is a look at employment to population ratios which clearly shows NO group has recovered from the Great Recession:

Employment / Population Ratios (from the BLS Household Survey) - Hispanic (blue line), African American (red line), and White (green line)

National Federation of Independent Business (NFIB)'s monthly Jobs Report Statement:

America's small businesses are continuing their hiring spree, with a net addition of 0.32 workers per firm, according to NFIB's monthly jobs report, released today. However, 25 percent of all owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem, matching the record high. Sixty-two percent of owners reported hiring or trying to hire employees, up five points from last month, but 54 percent reported few or no qualified applicants for the positions they were trying to fill (up five points).

"Small businesses continue to ignite the economy, with owners creating jobs and raising compensation for employees," said NFIB's President and CEO Juanita D. Duggan. "Across the nation, small businesses need qualified workers more than ever to keep the economy strong."

In the construction industry, 44 percent cited the difficulty of finding qualified workers as their Single Most Important Business Problem. Thirty percent cited it in manufacturing, but only four percent cited it in the wholesale trades industry.

Among all small business employers, 13 percent reported increasing employment an average of 3.3 workers per firm, and four percent reported reducing employment an average of 1.4 workers per firm (seasonally adjusted). Even with the current job openings, 38 percent of owners reported job openings they could not fill in the current period.

In construction, 59 percent had job openings, with 93 percent of those for skilled workers. In transportation services, 45 percent of businesses had skilled openings, and 14 percent of all firms reported using temporary workers.

"Productivity increased at a net 3.6 percent annual rate in the first quarter, which is the best reading in a decade," said NFIB's Chief Economist William Dunkelberg. "The increase in output per hour lowered unit labor costs, which reduced the pressure to raise prices to cover higher compensation costs. Nearly half of the private employment is in the small business sector, so productivity improvement is important for income growth for U.S. workers."

A net 34 percent of all firms reported higher worker compensation, unchanged from last month. Plans to raise compensation posted a four-point gain to a net 24 percent in May, a historically high level.

Click here to view the entire NFIB Jobs Report. For more information about NFIB, please visit nfib.com.

Caveat on the use of BLS Jobs Data

The monthly headline data ends up being significantly revised for months after the initial release - and is subject also to annual revisions. The question remains how seriously can you take the data when first released.

Econintersect Contributor Jeff Miller has the following description of BLS methodology:

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.

ADP (blue line) versus BLS (red line) - Monthly Jobs Growth Comparison

However, there is some discussion that neither the ADP nor BLS numbers are correct - as both are derived by a sampling methodology. The answer could be that there is no correct answer in real-time - and that it is best to look at the trends. As has been noted, all eventually end up correlating.

The BLS uses seasonally adjusted data for its headline numbers. The seasonally adjusted employment data is produced by an algorithm. The following graph which shows unadjusted job growth - seasonal adjustments spread employment growth over the entire year. Employment does not really grow in the second half of the year and always falls significantly in January.

Non-Seasonally Adjusted Employment - Private Sector

There is the proverbial question on what is minimal jobs growth each month required to allow for new entrants to the market. Depending on mindset, this answer varies. According to Investopedia, the number is between 100,000 and 150,000. The Wall Street Journal is citing 125K. Mark Zandi said 150K. Econintersect is going with Mark Zandi's number:

• In Econintersect's June 2014 economic forecast released in late May, we estimated non-farm payroll growth at 160,000 (unadjusted based on economic potential) and 229,000 (fudged based on current overrun of economic potential).
• If Econintersect uses employment-population ratios, the correct number would be the number where this ratio improved. Using the graph below, the ratio began to improve starting a little after mid-year. This corresponds to the period where the 12-month rolling average of job gains hit 150,000.

Employment to Population Ratio

Note: The ratio could be fine-tuned by adjusting to the ratio of employment to working-age population rather than the total population. However, this would not change the big picture that an increase of somewhere around 150,000 (+/-) is needed for the growing population numbers. We have estimated 140k - 160k. The number might possibly be within the range 125k - 175k. Econintersect cannot find a reason to support the estimates below 125k.

The question of how changing demographics impact the employment numbers is at the margins of analysis. Econintersect will publish more on this fine-tuning going forward, both in-house research and the work of others