Mish's Global Economic Trend Analysis

ADP vs. BLS Job Reports - Who to Believe?
ECRI's Lakshman Achuthan Still Blowing Smoke
Last-Ditch Attempts by State and Local Government to Save Jobs
Boomer Dynamics, Housing, Jobs Creation, and the Falling Participation Rate

ADP vs. BLS Job Reports - Who to Believe?

Posted: 04 Aug 2010 11:17 PM PDT

The ADP July National Employment report is out. Let's take a look.

Private sector employment increased by 42,000 from June to July on a seasonally adjusted basis, according to the latest ADP National Employment Report® released today.

July's rise in private employment was the sixth consecutive monthly gain. However, over those six months increases have averaged a modest 37,000, with no evidence of acceleration.

click on chart for sharper image

Large Businesses Added Zero Jobs

The chart shows that small and medium businesses added jobs while large businesses added a grand total of zero.

If small business hiring turns down, and I think it will, ADP is going to start reporting negative job growth.

Small Business Sentiment

The reason I expect a relapse in that small business jobs is small business sentiment is in the gutter as evidenced by recent Gallup Polls.

Corporate Hiring No Longer Improving; American Less Optimistic

Wells Fargo/Gallup Small Business Index Hits Record Low, Future Expectations Dip Below Zero First Time Ever

If large businesses are not hiring and small businesses do not increase hiring (or worse yet stop hiring), it's quite hard to be optimistic about jobs.

Hiring Not Improving

One of the things in the ADP report that caught my eyes was this short paragraph:

"July's rise in private employment was the sixth consecutive monthly gain. However, over those six months increases have averaged a modest 37,000, with no evidence of acceleration."

The key words in that paragraph are "no evidence of acceleration". It is consistent with the small business surveys mentioned above.

ADP vs. BLS Reports

Inquiring minds may be interested in seeing a comparison between ADP and the BLS (government) reports.

A direct number to number comparison using the standard BLS report is inaccurate because ADP reports private nonfarm jobs while the BLS reports all nonfarm jobs. The latter is tremendously skewed this year by census hiring and firing. It is also skewed by normal government hiring and firing.

Fortunately, the BLS does provide the private numbers in Excel format, so with minimal work an accurate comparison is possible.

Let's go back to January and see what the data looks like year to date.

Private Nonfarm Jobs – BLS vs. ADP
Month	BLS	ADP
June	+83,000	+19,000
May	+33,000	+63,000
April	+241,000	+65,000
March	+158,000	+32,000
February	+62,000	+3,000
January	+16,000	-82,000
Total	+593,000	+100,000
Average	+98,833	+16,667

Excluding January, ADP sports gains of 37,000 jobs a month. However, BLS data is not out yet so the proper comparison is January to June for both.

The difference is stunning.

Why the Difference?

The primary difference no doubt is the BLS "Black Box" Birth/Death Model that adds tens of thousands of jobs every month on the assumption that payroll data misses new business creation.

Which Set of Numbers Do You Believe?

ADP claims "Because ADP pays 1-in-6 private sector employees in the United States every pay period across a broad range of industries, firm sizes, and geographies, it has a unique and significant perspective on the U.S. labor market."

The BLS sample represents what?

Although ADP is missing some new business creation jobs, the pertinent question is how many? Remember that the BLS already had to revise its Birth/Death numbers lower once already. I think they will have to do so again.

It would be nice if the BLS posted their numbers without the birth/death revisions but they don't. Worse yet, it is impossible to untangle them because the BLS reports the job numbers seasonally adjusted, and the birth/death numbers unadjusted. One cannot simply subtract the numbers, yet every month people make that mistake.

Given this is neither a normal recession nor a normal recovery, the key point to remember is the BLS model likely remains hugely out of whack,. If so, their monthly job estimates are too optimistic.

What is the Correct Number?

Most likely the correct number is somewhere between ADP's number which does not factor in new business creation, and the BLS number which I believe hugely overstates it.

Let's be as generous as possible and toss January and February ADP data while including 42,000 jobs for July. That puts the most recent 5 month ADP private job creation level at 44,000 jobs a month.

The most recent 5 months for BLS (February thru June) average 115,000 private jobs a month.

A straight average between the BLS and ADP number yields 80,000 jobs a month. Barring a month-to-month negative participation rate, 80,000 jobs would be reflective of rising unemployment. With an increasing participation rate (which one should expect at this stage in a recovery), the net effect would be an even larger unemployment rate.

For a discussion of the participation rate, what it means, and how boomer demographics influences it, please see Boomer Dynamics, Housing, Jobs Creation, and the Falling Participation Rate

Finally, please note the unemployment rate is based on a household survey, not payroll data. Thus, one cannot compute the unemployment rate using either BLS or ADP payroll data. However, if the household survey matched the employment data, the results would be similar to what I suggested above - rising unemployment.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

ECRI's Lakshman Achuthan Still Blowing Smoke

Posted: 04 Aug 2010 01:02 PM PDT

Lakshman Achuthan and Anirvan Banerji, co-founders of ECRI maintain the ECRI' WLI Weekly Leading Index (Still) Widely Misunderstood

I am going to cut to the chase because all Achuthan and Banerji did in that piece is blow smoke without addressing the critical issue. Here is the key paragraph.

It's true enough, based on the four decades of publicly available data, that WLI growth has never dropped this far without a recession. What most don't know – apart from the fact that the WLI growth rate shouldn't be used to predict recessions in the first place – is that, based on two additional decades of data not available to the general public, there are a couple of occasions (in 1951 and 1966) when WLI growth fell well below current readings, but no recessions resulted.

ECRI Still Has Explaining To Do

Lakshman Achuthan chastised Rosenberg in the above article (but not by name) for doing exactly what the ECRI did: Propose the WLI can be used to predict recessions.

I documented proof of that in ECRI Weekly Leading Indicators at Negative 9.8; Has the ECRI Blown Yet Another Recession Call?

Just The Facts Maam, Not The Spin

If the ECRI does not want people assuming the WLI can be used as a recession forecast, then perhaps they ought not present it that way.

Please consider some charts and text from the ECRI publication The Great Recession and Recovery
ECRI Weekly Leading Index

"This is an index that's been around for over a quarter of a century, and over that time (shown here) it has correctly predicted every recession and recovery in real-time."

I need to repeat that, over this entire time period, I was present to see each of the correct recession and recoveries calls in real-time, without false signals in between.

ECRI Clearly Touts the WLI's Recession Prediction Capabilities

Please read the preceeding two paragraphs in italics slowly and carefully.

Lakshman Achuthan and Anirvan Banerji defense of the ECRI is that the WLI cannot be used to predict recession, yet in a blatant attempt to promote the WLI, the ECRI did just that!

Supposedly the WLI in "real-time" has correctly predicted every recession without a single false signal. Quite frankly that was a blatant attempt by the ECRI to promote the WLI's recession prediction ability.

Now the ECRI is caught. They touted the WLI in a blatantly misleading manner. Worse yet, they even took their own statements out of context to do so.

Flashback November 2007 ECRI Vol. XII, No. 11: Weakness In Leading Indicators Not Yet Recessionary

Please consider the following image snip. Highlighting is mine.

In November of 2007 the ECRI was bragging it did not forecast a recession "despite an inverted yield curve, which many economists have long considered to be the best predictor of a recession"

In contrast note the spin from The Great Recession and Recovery.

Accompanying that slide the ECRI said "And we issued a clear Recession Warning noting that: "The magnitude of oil and interest rate shocks are near recessionary readings." A month later, as we now know, the recession began.

Blowing Smoke or Outright Lie?

Just about now inquiring minds ought to be asking if the ECRI is blowing smoke or telling blatant lies?

I will leave that to the reader to decide.

My objection is not that the WLI is useless, my objection is that Lakshman Achuthan and Anirvan Banerji are speaking out of both sides of their mouths by promoting the WLI's ability to do what they say it cannot.

The recent article on the Big Picture does not address these issues. At best, it blows smoke.

Addendum - Email Comment From Janet Tavakoli:

Here is a comment from Janet Tavakoli who sent me the link to the article that I responded to above.

Hello Mish

I'd much prefer if ECRI would just present its data, its view in real time of what it means, and if it has to later change its viewpoint on what the data means, then do so and mention the earlier viewpoint to give context. We all learn from that kind of thought process. I'd still like to see the data , but now the commentary they provide for it has to be discounted. It's a real blow to their credibility, and it's a shame.

Everyone has been thrown off balance by governments and central banks intervening, doctored data, and more. We are all looking for people to trust, whether they get the interpretation right or wrong in the moment.

Best,

Janet

Thanks Janet!

The bare minimum the ECRI can do is

1. Stop promoting the WLI for uses it says are invalid
2. Apologize for their incorrect statements and usage of the WLI to promote the ECRI

Moreover, as Janet suggests, the best approach would be for the ECRI to actually publish the makeup of the index and let people draw their own conclusions. With the ECRI revising their own comments, blatantly out of context, they have indeed lost credibility.

Blowing smoke will not restore that credibility.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Last-Ditch Attempts by State and Local Government to Save Jobs

Posted: 04 Aug 2010 10:55 AM PDT

In a welcome but choppy and exceptionally slow start in terms of what needs to happen, some public unions are agreeing to pay cuts in order to save jobs. In other cases, cities are imposing their will with unions fighting every step of the way.

Please consider the New York Times article More Workers Face Pay Cuts, Not Furloughs

The furloughs that popped up during the recession are being replaced by a highly unusual tactic: actual cuts in pay.

Local and state governments, as well as some companies, are squeezing their employees to work the same amount for less money in cost-saving measures that are often described as a last-ditch effort to avoid layoffs.

A new report on Tuesday showed a slight dip in overall wages and salaries in June, caused partly by employees working fewer hours.

Though average hourly pay is still higher than when the recession began, the new wage rollbacks feed worries that the economy has weakened and could even be at risk of deflation.

Pay cuts are appearing most frequently among state and local governments, which are under extraordinary budget pressures and have often already tried furloughs, i.e., docking pay in exchange for time off. Warning that they will have to lay off people otherwise, many governors and mayors are pressing public employee unions to accept a reduction in salary of a few percentage points, without getting days off in exchange.

At the University of Hawaii, professors have accepted a 6.7 percent cut. Albuquerque has trimmed pay for its 6,000 employees by 1.8 percent on average, and New York's governor, David A. Paterson, has sought a 4 percent wage rollback for most state employees. State troopers in Vermont agreed to a 3 percent cut. In California, teachers in the Capistrano and Pacheco school districts have accepted salary cuts.

"We've seen pay freezes before in the public sector, but pay cuts are something very new to that sector," said Gary N. Chaison, an industrial relations professor at Clark University. Outsize pension costs and balanced budget requirements are squeezing many states as tax revenue has come up short.

Companies frequently say that compensation for unionized workers, in both wages and benefits, is out of line. For instance, the Westin Hotel in Providence, R.I., after failing to reach a new contract with its main union, has sliced wages 20 percent, saying its previous pay levels were not competitive with those at the city's many nonunion hotels.

The pain is felt across industries. At the Seattle Symphony, musicians have taken a 5 percent pay cut, while ABF Freight System, a major trucking company, has asked the Teamsters to agree to 15 percent less. The St. Louis Post-Dispatch has lowered pay 6 percent, while Newsday has gotten its staff to accept a 5 to 10 percent pay cut.

While most of the pay cuts seem to hit unionized workers, David Lewin, a professor of management at the University of California, Los Angeles, who has written extensively on employee compensation, says some cuts are also quietly taking place among nonunion employers.

Reed Smith, a firm with 1,500 lawyers, has cut salaries for first-year associates in major cities to $130,000 from $160,000. Warren Hospital, a nonunionized facility in Phillipsburg, N.J., ordered pay cuts of 2 to 4 percent because lower Medicaid reimbursements had squeezed the hospital's finances.

In Madawaska, Me., 460 unionized workers accepted an 8.5 percent wage cut in May to help keep their paper mill in business.

In Albuquerque, where the mayor pushed through pay cuts to bridge a $66 million budget deficit, the largest union of municipal workers is suing, arguing that the mayor's plan should include furloughs.

The mayor, Richard J. Berry, rejected that idea. "You want to keep people employed. You want to preserve public services. And you don't want to raise taxes," he said. "When you're trying to lower the cost of government while maintaining services, furloughs don't do the trick."

At the Mott's apple juice and sauce plant in Williamson, N.Y., 30 miles east of Rochester, 300 unionized workers have been on strike since May 23 over management's demands for a $1.50-an-hour wage cut, a reduction in company 401(k) contributions and higher employee contributions to health insurance. The strikers are seething over management's demands because the plant has been profitable and Mott's corporate parent, the Dr Pepper Snapple Group, reported record profits last year.

"They keep piling more and more work on us, but they want to pay us less and less," said Michele Morgan, a Mott's employee. "It's a slap in the face."

Economic Reality and Slap in the Face for Mott's Employees

I approve the right of those private union employees at Mott's to strike.

On the other hand, I approve the right of Mott's to move the entire operation to North Carolina or wherever in response. I also approve right to work laws that would allow non-union workers to take jobs of those strikers.

Michele Morgan is whining about jobs that the company says pays $21 and hour. The union disputes the figure.

Regardless, Michele Morgan does not know what a slap in the face is. A slap in the face is losing your job when a company says to hell with it and moves operations to a non-union city where they do not have to deal with such problems. A further slap in the face is when you are unemployed for 12 months and exhaust all your unemployment benefits.

The above paragraphs may sound cruel or harsh to some. It is neither. It is a slap in the face of economic reality. Michele Morgan needs a cold slap in the face of economic reality before she gets a slap in the face called the unemployment line.

Economic Reality and Slap in the Face in Albuquerque

I applaud mayor, Richard J. Berry who said "You want to keep people employed. You want to preserve public services. And you don't want to raise taxes. When you're trying to lower the cost of government while maintaining services, furloughs don't do the trick."

That is something most police and fire departments have not figured out. It is also only a start. Albuquerque needs to outsource as many public jobs as it can, and kill defined benefit pension plans that are no doubt at the heart of the problem.

Mayor Berry is attempting to save unions jobs. The unions complain about it. Those Albuquerque unions desperately need a well deserved slap in the face called privatization.

Scare Tactics and Economic Reality in Baltimore

Inquiring minds are investigating police and fire union grievances in Baltimore. Please consider Union billboard bashes mayor and council

This billboard appears to have sprouted up over the weekend in view of City Hall at the mouth of I-83, the latest salvo in the fight over pensions for city police and fire fighters. A spokeswoman for the unions say it will be up throughout the month of August.

Changes in the pension system - which strip more money from the paychecks of officers and firefighters - were made necessary by a deficit in the police and fire retirement fund that could have cost the cash-strapped city $65 million. That problem came as the mayor had to close a $121 million budget shortfall by raising taxes and new fees.

Union officials have filed a federal lawsuit accusing the city of purposely underfunding the pension system and arguing that the changes violate contractual labor agreements.

The mayor's office issued this statement regarding the billboard:

"Rank and file police and fire officers understand that cities that give full retirements to 41 year old government employees will go bankrupt before long.

Baltimore Slap in the Face

Police and firefighters are so used to getting what they want they have now resorted to scare tactics. I am actually grateful because I am quite certain the public will have little sympathy.

Ironically, the sign is a complete distortion of reality. That sign was not paid for by the Fraternal Order of Police or the Association of Fire Fighters.

That sign was paid for by Baltimore taxpayers in taxes and fees. The union siphons off a portion of that taxpayer money then has the gall to resort to such scare tactics.

Baltimore has two options both of which I approve.

1. Outsource the entire police department to the Sheriffs' Association
2. Declare bankruptcy in an attempt to get out from the burden of union greed

The Baltimore police and fire departments both need a cold slap in the face of economic reality that says they are complete fools for not appreciating how good they now have it.

Baltimore is bankrupt. It needs to recognize that fact and do something about it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Boomer Dynamics, Housing, Jobs Creation, and the Falling Participation Rate

Posted: 04 Aug 2010 01:55 AM PDT

Job estimates are often difficult to predict because month-to-month variances can swing wildly. However, census firing is about to take back another chunk of census hiring and I expect another bad looking jobs report this month.

Interestingly, Geithner is making excuses in advance.

Please consider Geithner Says Unemployment May Advance Again Before Declining

Treasury Secretary Timothy F. Geithner said U.S. unemployment may rise again before it falls and the economy isn't recovering rapidly enough.

"It's possible you're going to have a couple months where it goes up," he said on ABC's "Good Morning America" program. "People start to come back into the labor force, and that can cause the measured unemployment rate to go up temporarily."

The U.S. economy grew at a slower-than-expected 2.4 percent pace in the second quarter as consumer spending slowed, according to Commerce Department data. Companies probably added about 90,000 jobs in July, according to the median estimate in a Bloomberg News survey before the Labor Department's Aug. 6 employment report. The jobless rate is forecast to rise to 9.6 percent from 9.5 percent.

Geithner's Disingenuous Statements

When Geithner says ""People start to come back into the labor force, and that can cause the measured unemployment rate to go up temporarily" he is talking about the Participation Rate (the percentage of the working-age population who are currently employed or are actively seeking work).

The theory Geithner is using is that in a recovery, people who were not in the work force start looking for jobs. Those actively looking for jobs are considered unemployed.

The reality is that were it not for a huge decline in the participation rate (deep into an alleged "recovery"), the unemployment rate would far higher.

Indeed, the unemployment rate dropped in 2010 only because people gave up looking for jobs as unemployment benefits expired.

Civilian Participation Rate

Perhaps people start looking for jobs, but there certainly is no sign of it. If it happens this month, in the face of census firings, the unemployment rate could potentially soar.

Demographics

Bear in mind that it takes between 100,000 and 125,000 jobs a month to keep up with demographics (birth rate plus immigration).

2010 Job Gains As Initially Reported

June -125,000
May +431,000
April +290,000
March +136,000
February -36,000
January -44,000

The net of that is +652,000 jobs in six months, approximately enough to keep the unemployment rate flat for the year. Instead, the unemployment rate dropped along with the participation rate.

Had the participation rate risen (more people looking for jobs than giving up), the unemployment rate would be closer to 10.5%.

Baby Boomer Retirement

The massive increase in the participation rate between 1960 an 2000 is a result of single wage-earner households going to dual wage-earner households (both husbands and wives working), a decrease in average family size, and other boomer related dynamics.

Now, as boomers head for retirement we can and should expect the participation rate to decline. However, I took that into consideration with my estimate that it takes 100,000 to 125,000 jobs a month to keep up with birth rate and demographics. In 2000, the number was close to 150,000 a month.

Bernanke's estimate is 100,000 jobs a month. However, I think he is slightly low-balling for obvious reasons. Regardless, we are both in the same ballpark.

Clinton vs. Bush vs. Obama

Clinton not only had far more favorable demographics to work with than either Bush or Obama, he also happened to be president during the midst of a genuine productivity boom, falling commodity prices, and an internet revolution that created millions of jobs.

In terms of job creation, Clinton was lucky. That combination will not be seen again for decades and he did not have to do anything to get it.

However, one must play the hand one has been dealt, and to show I am not taking partisan sides, Bush and Obama have both blown it with misguided policies and stupid wars.

Housing Boom and Housing Bust

Let's zero in on the participation rate since 2000 to see what trends suggest.

The above chart shows the effect of the Greenspan induced housing bubble.

Even though housing peaked in 2005, commercial real estate temporarily picked up where residential housing left off. That combination kept employment high with countless Home Depots, Lowes, Pizza Huts, etc, adding jobs for two years even as housing went into a tailspin.

This all ended in late 2007 with a thunderous crash of housing, commercial real estate, commodities, and the stock market.

In late 2009, the participation rate rose as people who thought there might be jobs, started looking for them. It was a mirage. As people exhausted their unemployment benefits, they gave up and instead started collecting social security.

Note that as soon as someone stops looking for a job (even if they want one), they are not considered to be unemployed, nor are they a part of the labor force, thus the participation rate drops.

Dynamics at Play

To accurately predict trends in unemployment, one not only needs to estimate the number of jobs the economy will create (or lose), one has to get boomer dynamics and the participation rate as well.

Ironically, one can be wrong on both estimates and still come out OK if the forces balance out.

Best of this Recovery is Over

If the participation rate jumps now, so will the unemployment rate. If jobs decline and the participation rate jumps, the unemployment rate will soar.

To make substantial progress on the unemployment rate, it will take continuously rising jobs (substantially above 100,000 a month), and a falling participation rate.

Not to blow out any recovery candles, but that combination is highly unlikely.

Looking ahead, the jobs picture appears bleak. The best of this recovery is over: Corporate Hiring is No Longer Improving and Americans are Less Optimistic.

Geithner is making excuses in advance, hoping for a miracle that is unlikely to come.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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