Jobless Recovery My Foot

by | Apr 7, 2004

The Bureau Labor Statistics released its payroll jobs report for March earlier this month, and the reported growth of 308,000 jobs for the month is a blessed relief in what has been called a “jobless recovery.” But this should really be no surprise. As I first argued last September, this has never been “jobless recovery.” […]

The Bureau Labor Statistics released its payroll jobs report for March earlier this month, and the reported growth of 308,000 jobs for the month is a blessed relief in what has been called a “jobless recovery.”

But this should really be no surprise. As I first argued last September, this has never been “jobless recovery.” Based on the rip-roaring pace of economic growth and strong evidence of job gains by virtually every other measure, this month’s very big and very positive number is long-awaited catch-up. Until today, I’ve been convinced that the payroll jobs report is, simply, broken. It doesn’t work.

It’s very lucky that this broken indicator finally gave an accurate reading this morning, because this payroll report is probably going to determine the course of interest rates in the U.S. for the rest of the year. And it might determine who is elected president in November, too.

Never before has so much depended on faulty statistics prepared by hapless bureaucrats serving a life sentence at the Department of Labor. But that’s the way it is.

Why do I say the payroll report is broken?

Until today, the payroll jobs report had shown only 294,000 new jobs in the eight months since June of last year. The typical eight-month period over the last decade has shown four times as much job growth — even though these last eight months have been ones of unusually rapid overall economic growth (including one quarter with the fastest GDP growth in 20 years).

Today’s report backwardly revises all that — way upward. As well it should, because all along another jobs report prepared by the same government agency — but using a different methodology — has painted a different picture. Instead of the 294,000 jobs in the payroll report, the “household survey” has shown 628,000 new jobs.

Weekly claims for unemployment insurance have been running lower than they were a decade ago, when payroll jobs were expanding at eight times the current rate. The March employment index of the Institute for Supply Management is at a 17-year high. The Bureau of Economic Analysis of the Department of Commerce just calculated that average wages have been growing at more than a 5% annualized rate.

With all that evidence, it has made no sense that this one measure — the payroll report — is alone in showing such sluggish job growth. It’s broken. But what exactly is wrong?

In part, it’s because the payroll report looks only at jobs at existing companies and government entities. In a time of economic turnaround, when lots of people start brand new small businesses or go to work on their own, this method is going to miss a lot of the jobs being created.

Theoretically, the Bureau of Labor Statistics adjusts for this problem, by reviewing nationwide unemployment insurance data to scale-up its results to reflect new businesses that have been created. But in practice, it does this adjustment only once a year, in February. Right now, the results from February reflect the data that were available then, which went only through the second quarter of 2003 — right in the middle of the war in Iraq. A lot has changed since then in the economy, but the BLS won’t revise its adjustment factors until next February.

Economist Brian Wesbury, with the bond firm Griffin, Kubik, Stephens and Thompson, has used more recent data to create his own version of the payroll jobs report. Based on this, he thinks the Bureau of Labor Statistics has underestimated job creation since last June by at least 734,000. He says he’s talked to the Bureau’s bureaucrats, and reports they are “set in their ways,” and that they won’t update their data until next February. Period.

So the payroll report will continue to underestimate job growth. That’s right — even today’s great number is probably too low. So what? Here’s what.

Alan Greenspan has made it clear that no matter how fast the economy grows, the Federal Reserve won’t raise interest rates until it sees job growth pick up. And he has declared that he regards the payroll report as the best indicator of jobs growth.

What a colossal double mistake. Ignoring evidence of inflation all around him, Greenspan is letting jobs growth determine interest rate policy. And what’s worse, he’s chosen to follow the worst possible indicator of jobs growth.

So if today’s payroll report had been another dud, we could have been sure that Greenspan won’t raise interest rates till the end of the year at the very soonest. Now the groundwork has been laid for doing the right thing, by nipping new inflationary impulses in bud.

And then there’s the presidential election.

So far this year, the Democrats have used the payroll jobs report as evidence that President Bush’s economic policies have been a failure. They’ve done such a terrific job at it that consumer confidence is down, and the stock market has stagnated so far this year.

When the stock market falls, voters get unhappy — remember, more than 50% of voters have 401(k) accounts. The worse the market does, the worse are Bush’s re-election chances. As I’ve explained in this column before, I believe strongly that the market would prefer to see Bush re-elected so that his pro-growth tax policies can be extended. The prospect of his failing to be re-elected would suppress the market even more.

A perfect vicious cycle — all based on bogus statistics.

On the other hand, this month’s big positive jobs report could get the cycle running in the opposite direction. If public sentiment is catalyzed around the realization that the economy really is booming (and it really is), then the stock market will rise. The more the market rises, the better Bush’s chances. And the better Bush’s chances, the more the market will rise.

A perfect virtuous circle. Maybe such a thing will get started today, but it’s terrifying that it all depends on the bogus statistics finally telling the truth, if only by accident.

So what do we do, as investors? If we know our compass is broken, then we just have to find some other way to tell which way is north. That we can do. I know where north is. I know that this economy is booming, and that by all rights the market ought to very quickly make up for any ground it lost so far this year.

The problem has been how we deal with all those other people wandering around in the wrong direction because they refuse to admit that their compasses are broken. After today, maybe even they will get pointed in the right direction. The optimism we’ve expressed here about the market over the last month is finally about to be rewarded.

The above article is an “Ahead of the Curve” column published April 2, 2004 on SmartMoney.com.

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Don Luskin is Chief Investment Officer for Trend Macrolytics, an economics research and consulting service providing exclusive market-focused, real-time analysis to the institutional investment community. You can visit the weblog of his forthcoming book ‘The Conspiracy to Keep You Poor and Stupid’ at www.poorandstupid.com. He is also a contributing writer to SmartMoney.com.

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