Disappointing Employment Data: A Look Beneath The Hood – Forbes

State Initial Claims

On Friday, markets were disappointed by the meager +210K (seasonally adjusted (SA)) headline Payroll Report (The Establishment Survey).The consensus expectation was for more than +570K with the lowest survey participant at +375K.Remember that the BLS adds a lump of more than +100K to the actual survey results each month (the birth-death model).

Markets were even more frustrated because on Wednesday, ADP had reported that private employers added +534K in November, (ADPs report is based on their payroll business which processes paychecks for 20% of Americas private employers).

At the same time the Payroll Survey is taken (always the week of the month that includes the 12th), its sister survey also occurs The Household Survey.That survey showed job growth of +1.14 million SA (your read that right not a typo).That is a blockbuster number if there ever was one!And, because the much-watched U3 Unemployment Rate is calculated from the Household Survey, the U3 fell from 4.6% to 4.2%.

So, which survey is correct? How can there be such a divergence?

We have stated in this blog time and time again that one should not rely on SA data while the pandemic is still causing havoc in the U.S. and world economies.We believe that seasonal adjustment factors can cause the resulting data to be misleading when the data is influenced by events that are unique.

November is normally a period when hiring occurs in the Retail Trade sector.In all the Friday instant analysis that we read, Retail Trade was blamed for the disappointing employment data, showing up as -20.4K (SA).In actuality, retail hired +331.6K thats the Not Seasonally Adjusted (NSA) number, and, yes, once again, you read that correctly.

The reality is that on an NSA basis, both surveys actually produced very strong results.And those results were corroborative (see table), in that the NSA Payroll and Household numbers are very close.

Payroll and Household Survey

As usual, markets shot first.Based upon the disappointing +210K headline number, markets quickly concluded that the Fed wouldnt be raising interest rates as early in 2022 as previously thought, and Treasury yields, especially on the longer end of the curve, nosedived.The 10-Year yield fell 10 basis points (0.10 percentage points) on Friday alone and is now down 32 basis points over the last two weeks.

As an aside, it appears that you can use Powells public statements as a contrary indicator.For several months markets have been pressuring him to turn hawkish.Now that he has finally conceded (wont use the term transitory anymore), it appears that markets have concluded that his initial position was most likely correct, and while the Feds Chair has now turned somewhat hawkish, markets have now turned dovish.(Will Powell pivot yet again?)

We have kept a weekly scorecard of the Continuing Unemployment Claims by state since May 15 when states began to opt-out of paying the extra $300/week of supplemental unemployment benefits funded by the federal government.While we have read elsewhere that there were no notable differences between the opt-in and opt-out states, our data clearly shows that, not only were there differences, but they appear to be significant.Between May 15 (the base data week) and September 25 (the federal programs officially ended the first week of September), in aggregate, the opt-out states had reduced their unemployment levels by -50.5%, more than double the -24.2% of the opt-in states.At the time the federal supplements ended, our view was that the opt-in state data would begin to play catch-up.And, indeed, that is what seems to be happening.As of November 20, the opt-in states are now at -50.9% (i.e., their unemployment is -50.9% lower than it was on May 15), accomplishing in two months what it had taken four months to accomplish when federal supplement were available.

Scorecard: Opt-ins vs Opt-outs

Since the federal supplements ended, the opt-in states have shown a much faster pace of re-employment than the opt-out states.The conclusion appears inescapable: the federal unemployment supplements were a disincentive to re-employment!

Also in past blogs, we have commented on the Labor Force Participation Rate (LFPR), the percentage of the working age population either with a job or looking for one.Specifically, we noted that the LFPR in Canada was nearing its pre-pandemic level while it was still holding near its pandemic lows in the U.S.Again, we opined that we suspected the federal supplemental programs had played a role.And we were disappointed when Octobers LFPR did not show any improvement.

Novembers data, however, did show a positive move as the LFPR ticked up to 61.8% from 61.6% in both October and September.Even better was the progress in the most impacted demographic groups.For females aged 25-34, those most likely to have young children, the LFPR rose by 0.9 pct. points from 76.3% in October to 77.2% in November perhaps some thawing in the child-care situation and certainly impacted by a return to in-person schooling.For 20-24 year-olds, those most likely to work in lower paying service jobs, the LFPR rose to 72.1% from 71.3%; and for those considered unskilled, to 55.7% from 55.0%.We believe we will see such a positive trend for the next several months.

Last week we commented that the 199K Initial Unemployment Claims (ICs) that the markets got hyped up about was a false start once again caused by the seasonal adjustment process.We noted that while the SA data fell, the NSA series actually showed an increase (see chart at the top, second bar from the right had side). This past weeks data release (for the Thanksgiving week - November 27) showed the decrease in the NSA data expected in a holiday week.And, no surprise, the SA ICs rose.

(Joshua Barone contributed to this blog.)

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Disappointing Employment Data: A Look Beneath The Hood - Forbes