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Sunday, October 7, 2012



Gallup Goes To Town On BLS Massagery

Tyler Durden's picture

Whether it is a fringe-blog pointing out the statistical un-possibility (here and here), or a previously well-respected 'elite' pointing out the suspiciousness (here), most of the general public (or their media-based oracles) prefer not to swallow the red pill of reality with regard Friday's data SNAFU. However, given the political (and economic) consequence of a single-number, Gallup has decided to weigh in on reality as they note "even though the Household survey tends to be very volatile, this decline seems to lack face-validity, particularly after the prior month's numbers" as they analyse why the household results should be discounted heavily. Critically, they, like us, suggest the 'unemployment rate' needs to be replaced as a measure of joblessness, suggesting a far simpler (and more transparent) measure - Payroll-to-Population - would avoid the 'adjustments' and 'biases' that are inherent in the BLS's bafflement. The Gallup measure suggests, as one would perceive using common-sense, that the real jobs situation was essentially unchanged last month.

Time to Replace the Unemployment Rate

This blog mentioned in mid-September that it was possible -- if unlikely, based on Gallup's survey data that include 30,000 interviews per month -- that September's seasonally adjusted unemployment rate could fall to 7.9%. Still, Friday's BLS report of a drop to 7.8% in the Household survey seemed to surprise everyone, as has been the case on many occasions this year.
The problem is that even though the Household survey tends to be very volatile, this decline seems to lack face-validity, particularly after the prior month's numbers. The consensus estimate was that the government would report that the unemployment rate was unchanged at 8.1% in September. GDP growth was 1.3% in the second quarter and seems to be no better this quarter. The government's Establishment survey shows there were 114,000 new jobs created in September -- very close to the consensus of 113,000 -- and not sufficient to lower the unemployment rate.
The obvious conclusion is that a new employment measure is needed. Gallup has proposed such a measure -- Payroll to Population (P2P) -- the number of Americans employed full-time for an employer as a percentage of the U.S. population. This is a much simpler measure that has none of the numerous adjustments made to the seasonally adjusted unemployment rate. The P2P deteriorated slightly to 45.1% in September from 45.3% in August, suggesting the real jobs situation was essentially unchanged last month.

Household Results Should Be Discounted
A quick comparison of the government's seasonally adjusted and unadjusted employment data seems hard to reconcile with the weak economy. For example, the government shows the number of employed workers increasing by 775,000 in September from August on an unadjusted basis. This surge in hiring seems surprisingly large given the current economy, not to mention the even larger adjusted increase of 873,000. Similarly, the number of unemployed declined by 954,000 in September on an unadjusted basis. This is reduced to a smaller adjusted decline of 456,000 -- but both numbers are also surprisingly large.

The Household data raise similar questions when averaged over time. Over the past two months, the unadjusted increase in the number of Americans employed has totaled 207,000 while the number of unemployed workers has declined by 1.66 million. The difference is made up by a decline of 1.45 million workers in the size of the workforce.
As a result, the unadjusted unemployment rate has plunged by one percentage point over the past two months to 7.6% from 8.6% -- an enormous decline given the weak economy.
Over the same period, the seasonally adjusted rate has fallen 0.5 points to 7.8% in September from 8.3% in July.
Focus Should Be on Payroll to Population 
The lack of face-validity of the government's unemployment numbers creates major problems, particularly during a presidential election year. The situation is worsened by the huge number of complex adjustments made to the data. Rather than debate whether something is wrong with the government's estimation process, it seems reasonable to look at other measures as an alternative.
Gallup's P2P is such an alternative. It is simple to calculate and thus, transparent to the public. It is based on 30,000 phone interviews a month. Most importantly, it provides insight into real job market conditions.

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