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As Jobs Decline

by: Michael Shedlock August 01, 2008    
Michael Shedlock

Michael Shedlock

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Before taking a look at the monthly jobs data, let's take a look at weekly claims. The US Department of Labor is reporting Initial Unemployment Insurance Claims continue to rise.

Seasonally Adjusted

In the week ending July 26, the advance figure for seasonally adjusted initial claims was 448,000, an increase of 44,000 from the previous week's revised figure of 404,000. The 4-week moving average was 393,000, an increase of 11,000 from the previous week's revised average of 382,000.

Unadjusted

The advance number of actual initial claims under state programs, unadjusted, totaled 375,627 in the week ending July 26, a decrease of 36,898 from the previous week. There were 257,426 initial claims in the comparable week in 2007.

Jobs Decline 6 Consecutive Months

This morning, the Bureau of Labor Statistics (BLS) released the

July Employment Report

. Jobs were negative for a 7th consecutive month. My target of 6% or higher stated unemployment by the end of the year remains on track. Here is a synopsis of that report.

The unemployment rate rose to 5.7 percent, and nonfarm payroll employment continued to trend down in July (-51,000), the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Employment continued to fall in construction, manufacturing, and several service-providing industries, while health care and mining continued to add jobs. Average hourly earnings rose by 6 cents, or 0.3 percent, over the month.



Establishment Data

(Click on charts to enlarge.)

The establishment data was the 7th consecutive decline.

Highlights

  • 22,000 construction jobs were lost
  • 35,000 manufacturing jobs were lost
  • 17,000 retail trade jobs were lost
  • 24,000 professional and business services jobs were lost
  • 5,000 service providing jobs were lost
  • 1,000 leisure and hospitality jobs were added
  • 25,000 government jobs were added

A total of 46,000 goods-producing jobs were lost (higher paying jobs), and for the first time this year service sector jobs were lost. Government, the last place one wants to see jobs, added 25,000 jobs or the service sector would have contracted more.

These are clearly recession totals.

Birth/Death Model Absurd Once Again

This was a very weak jobs report. And once again the Birth/Death Model assumptions are absurd. However, they are back in orbit this month, somewhere near Mars, from deep outer space where they have been since February.


 

Every month I say the same nearly the same thing. The only difference is the numbers change slightly. Here it is again: The BLS should be embarrassed to report this data. There is a difference this month. The data is back in the solar system. I expected a massive negative revision downward this month (my call was -425,000) and the reason is that January and July are the months that the BLS makes some effort to catch up with past ridiculousness.

And there is a ton of past ridiculousness to catch up on, in the construction, financial activities, and professional & business service categories. Note the January number of -378,000. I expected another month similar to that, but it was not to be, not this month anyway. The economy is clearly in contraction and the BLS model still has the economy expanding, although just barely.

Repeating what I have been saying for months now, virtually no one can possibly believe this data. The data is so bad, I doubt those at the BLS even believe it. But that is what their model says so that is what they report.

BLS Black Box

For those unfamiliar with the birth/death model, monthly jobs adjustments are made by the BLS based on economic assumptions about the birth and death of businesses (not individuals). Those assumptions are made according to estimates of where the BLS thinks we are in the economic cycle.

The BLS has admitted however, that their model will be wrong at economic turning points. And there is no doubt we are long past an economic turning point.

Here is the pertinent snip from the BLS on Birth/Death Methodology.

  • The net birth/death model component figures are unique to each month and exhibit a seasonal pattern that can result in negative adjustments in some months. These models do not attempt to correct for any other potential error sources in the CES estimates such as sampling error or design limitations.
  • Note that the net birth/death figures are not seasonally adjusted, and are applied to not seasonally adjusted monthly employment links to determine the final estimate.
  • The most significant potential drawback to this or any model-based approach is that time series modeling assumes a predictable continuation of historical patterns and relationships and therefore is likely to have some difficulty producing reliable estimates at economic turning points or during periods when there are sudden changes in trend.

The important point in this mess is that both the job data and employment data are much worse than appears at first glance (and the first glance looked horrid).

Table A-12

Table A-12 is where one can find a better approximation of what the unemployment rate really is. Let's take a look


 

If you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, etc., you get a closer picture of what the unemployment rate is. The official government number jumped to 5.7%, but U-6 (the most inclusive number) rose .4 to 10.3%. To the average Joe on the street unemployment feels more like 10.3% (if not 15%) than 5.7. Both numbers are poised to rise further. We are easily on pace for my 6% target by the end of the year.

Yesterday, in July Payroll Playbook, I discussed the ADP National Employment Report, and the ADP Small Business Report. I also made some predictions and here they are.

July Is A Revision Month For BLS

Looking ahead to the report on Friday, it important to consider that January and July are revision months for the BLS. Guessing at what the Birth/Death Model revision will be is certainly fraught with danger, but I am going to go out on a limb anyway.

My guess the Birth Death revision will be -425,000 and the actual reported jobs number for July will be -178,000, with unemployment rising to 5.7%. If the jobs number is negative, it would be the 7th consecutive monthly contraction. These are the kind of guesses that can make one look silly but there they are.

I am also anticipating the first outright contraction in the service sector even with the strength that ADP is reporting in small businesses. Whatever that strength is, I expect it to be flooded by losses this month and next given this June 25th report: U.S. Retail Store Closures Are Flirting with Six-Year High.


Scorecard

5.7% unemployment: Correct on the nose.

Contraction in service sector: Correct barely, but I will take it.

Birth Death Revision -425,000: Huge miss as discussed above

Headline number -178,000: Pretty bad miss but bear in mind that number was based on the expected huge revision in the Birth/Death number. And as I stated above, there is a huge amount of catching up in the BLS Model.

Looking ahead, I expect the service sector to weaken considerably. Bennigan's and Mervyn's both went bankrupt this week, Starbucks (SBUX) is closing 600 stores, mall vacancy rates are rising, and a huge contraction in commercial real estate is finally started. There is no driver for jobs and states in forced cutback mode are making matters far worse.

For more on the problems facing states, please see Schwarzenegger Cuts Wages of 200,000 Workers and New York Governor Warns Of Economic Crisis.

Indeed, the credit crunch has reached critical mass and is now picking up steam. Unemployment is poised to soar. The 6% number I projected back in December with unemployment then at 4.8% is now looking way too optimistic.

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This article has 12 comments:

  •  
    Aug 01 03:14 PM
    Great article, you seem to have a good grasp on things. How long do you think we will be losing jobs?
    Reply
  •  
    Aug 01 05:29 PM
    Mr. Shedlock, I have followed your articles for months. VERY impressive. The surprise I mentioned at one point to you was why I didn't see more comments from this community! It demonstrates the cognitive dissonance between wealth classes in the USA and the 'encapsulation effect'.

    More importantly, it demonstrates and will further demonstrate Wall St. ALWAY falters when Main St. twists. I am not talking about all citienzs either, I am talking about small business, ignored by government, banking and investment community for five years. Investment decisions without this sense of realism is destined to fail.

    No need to ask for help, the free market will correct the imbalance but first, the Middle Class are going to take it in the rear for the next three or so years and that makes me upset at our Feudalistic/Fascist style government. Meanwhile, government better beware, the Middle Class is not going sit around for four years and all go on foodstamps and live in Hoovervilles.
    Reply
  •  
    Aug 01 10:11 PM
    Mish, once again you have nailed this. The BLS is continuing to post these numbers along with the inflation data in an insane effort to postpone any consequences until after the election. The ability to distort the facts in the name of maintaining confidence will have a huge, it not lethal, boomerang effect when the worldwide investing community pushes back from the roulette table and realizes that any investment based on the U.S. Government's economic data and the lack of honest corporate reporting is impossible. Perhaps the BLS should create a "Tier 3 Data Site" so they can post this nonsense.
    Reply
  •  
    Aug 02 10:54 AM
    Good work Mish, keep it up. Even tho all Govt. stat reporting Bureaus are vaccinated against embarrassment on taking the job, it is still satisfying to see Pros like yourself kicking their ankles raw for foisting this garbage off as tho we are as unsuspecting as they are dumb.

    As in bygone days, when you really need this info to hit the target, a great deal of "Kentucky Windage" being applied identifies the true marksman.

    As with everything else, throwing more dollars at it will be a big help.
    I wonder how many of those 25,000 new hirees are at this moment holding wet fingers to the wind to gauge a 4% inflation hurricane.
    Reply
  •  
    Aug 02 11:12 AM
    Jobs declines will continue.
    I have posted about how every 25 years is associated with financial crisis. In 2007, right on time, we had the Mortgage Crisis.
    Reply
  •  
    Aug 02 02:28 PM
    What you did not say is what the government will do; it will meddle and in the process make things worse. I see more stimulus and then massive public works, followed by the dreaded helicopter attacks. I think the only fix is gold and a farm since you can not eat gold. Am I depressed, yes because I can not see how this ends well. I am depressed - greatly.
    Reply
  •  
    Aug 02 03:16 PM
    its notb really bls-its just bs.if you double the 5.7% you are closer to the truth.i know,i know where is my proof with charts,& graphs etc. i know people that arent counted,would like to work for a fair wage but cant achieve this as this country,s middle class will face a declinig standard of living & they keep reelecting the same fools & then give them A 9% approval rating.each generation gets dumber & the pols love it as they gain more control over everything & send their kids to private school while making sure they dont enlist in our voluntary armed forces.not only do the poor dont count the middle class doesnt either.
    Reply
  •  
    Aug 02 05:26 PM
    Bombastic article! The posts all have the same theme....the END of the world (as we KNEW and LOVED it) is VERY near! The posts are spot on..especially whidbey's comment about BUYING GOLD and a FARM!
    Reply
  •  
    Aug 02 05:42 PM
    "Looking ahead, I expect the service sector to weaken considerably. Bennigan's and Mervyn's both went bankrupt this week, Starbucks (SBUX) is closing 600 stores, mall vacancy rates are rising, and a huge contraction in commercial real estate is finally started. There is no driver for jobs and states in forced cutback mode are making matters far worse."

    This is the most important observation in your article. Little has been said about the coming disaster for commercial real estate, but the REIT market has certainly taken notice. The Dow Jones Real Estate Index "IYR" and most of the REIT's that make up the index are in full retreat, well below their 200 day moving average, just like every stock market index except Canada. Global recession is coming.

    Little has been said of the commercial real estate mortgages that are bundled in the SIV's with a wide range of quality and yields that are sliced and diced and sold to the stupid that have no idea of what they bought. Much of SIV's has no quality and very high yields, which attract stupid hedge funds with short sighted plans of interest rate trends. Many of the commercial loans were close to 100% L/V and are upside down and just have not been marked to market because there are few competent appraisers anymore to correctly reflect the true market values of these properties. It should not be long till you start hearing of fire sales that no on attends because there is no new mortgage money available for commercial loans that has not been already set aside to bail out residential mortgages.

    Then there are all of the developers with partially completed properties or land developers that will not be able to keep up the interest payments.

    First Priority is the first Florida bank to fail since Guaranty National Bank in Tallahassee in March 2004, the FDIC said. There have been 8 bank failures so far this year, The FDIC has a watch list of 90 banks and I read of one projection that there may be 300 or more failures this year. Write-downs are now at $484 Billion and are expected to exceed one trillion dollars! This last failure in Florida has 840 accounts with $13 million in uninsured deposits! That will tear the heart out of a lot of unsuspecting retired folks.
    Reply
  •  
    Aug 02 08:05 PM
    as i said-dumb & dumber.why would anyone keep money in a bank over he fdic insurance limit?as it is if there are enough failures even fdic wont have enough funds.
    Reply
  •  
    Aug 02 09:50 PM
    How come there is no speculation about how much HELOC money there is/was in the markets? What in has gone pffft, and there isn't any more coming.
    America=
    Spend more than you earn.
    Borrow more than you can repay.
    Import more than you export.
    Sic transit gloria.
    Reply
  •  
    Aug 03 12:22 AM
    Come now... people who "gave up" looking for jobs are people who AREN'T LOOKING FOR JOBS. They should not be counted as "unemployed."... People who are looking for full-time jobs but find only part-time should be accounted for, though.
    Reply
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