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Explaining Yesterday's Seasonally Adjusted Nonfarm Payroll "Beat"

Tyler Durden's picture




 

Since there still is confusion regarding yesterday's whopping "surge" in non-farm payrolls, which represented a 243K jump in the Establishment survey (of which 490K was temp jobs, same as in the Household Survey where temp jobs soared by a record 699K), yet only to arrive at an employment number last seen ten years ago, when the US population was about 30 million lower (think about that: 30 million increase in population and no change in the total employed), here is the final explanation of what happened yesterday.

As everyone knows by now, January is when the BLS imposes its annual seasonal adjustment revision (more on that in a second) for the previous January-December period. What this manifests itself most directly in, is the divergence between the Nonadjusted January number of the establishment survey of any given year and the Unadjusted number. And while the January adjustment is always substantial, it is the fact that the so-called beat was entirely based on assumptions that makes yesterday's NFP number so meaningless, and hardly the basis to assume that the US economy has taken off.

The chart below shows the adjusted and unadjusted employment survey data for total Nonfarm Employees. The annual January overadjustment is more than evident. Just as evident are the subsequent under-adjustments as seasonal data is lowered to account for volatility in the NSA data. What is very notable is that in January, absent BLS smoothing calculation, which are nowhere in the labor force, but solely in the mind of a few BLS employees, the real economy lost 2,689,000 jobs, while net of the adjustment, it actually gained 243,000 jobs: a delta of 2,932,000 jobs based solely on statistical assumptions in an excel spreadsheet!

So how does this data fit in specifically in the context of the just passed NFP whopper of a number? Simple. The chart below shows the January seasonal adjustment for the past 4 years, since 2009. The number of jobs added for "seasonal" purposes to the NFP number were as follows: 2009 - 2,006,000; 2010 - 1,970,000; 2011 - 2,129,000, and the all important 2012: 2,146,000. Once again, this is the number added to the NFP unrevised baseline to get a "final" number which is then blasted to the media. The chart below shows the historical January adjustment, to the NFP data, as well as the 2012 reported adjustment, and also what the statistical adjustment would be for the NFP number to have the NFP number come in line with expectations of a 140,000 beat.

Here is the kicker: the market mood yesterday would have been far more somber if instead of a seasonal fudge-factored statistical addition of 2,146,000 jobs, the BLS had decided on a number that is merely the simple average of the statistical adjustment of the past 3 years, which comes down to 2,035,000. In fact, had the BLS used this seasonal adjustment, the final NFP headline number (SA) would have been +132,000, or a miss of expectations of 8,000 (the Seasonal Adjustment number to get to consensus January expectations would have to be +2,043,000 to the NFP number). In other words, the difference between a + and - 2% move in the stock market is based on less than a 5% variation to the entire January seasonal adjustment, as had the BLS add just the simple average, the BLS report would have been a disappointing miss, and the market would have likely dropped (although with 5 momos in charge of the entire market, the thesis would have likely promptly shifted to "more QE coming" so who really knows). And now you know how the BLS' seasonal adjustment, which as Charles Biderman pointed out yesterday is guarded as secretly as Coke's recipe, defined the tone and the mood of the market for at least one month.

Finally, as to some newsletter and namesdropping blogs allegation that the Labor Force did not, in fact, increase by 1.2 million in January, we have one simple question: just how does one "refute" a statement with an assumption? Because last we checked, the BLS did not provide a smoothing breakdown of how it applied its seasonal adjustment for the "population control effects" which saw the population increase by 1.7 million in January and those not in the labor force rose by 1.2 million. Quite the contrary , what the BLS did provide is Table C: "December 2011-January 2012 changes in selected labor force measures, with adjustments for population control effects" which does show how on an apples to apples basis the adjustment factors did in fact impact the two key components in determining the unemployment rate: the amount of Americans employed, and those not in the labor force.

And while one can try to say it is inconceivable to say that the US population jumped by 1.7 million in one month, we reply that this is coming from the BLS whose admission of the "population control effect" adjustment merely confirms that it has been misrepresenting the actual labor force participation rate for at least a year. In other words, while one may pander to semantics, and believe that a data series is not a data series because of one's mastery of sophistry and assumptions, this is totally irrelevant: the end result is that in January, those "not in the labor force" did in fact rise by 1.2 million (whether compared to December or to 2011 - please, go ahead and check as many times as needed), and the labor force participation rate dropped to a new 30 year low of 63.7%, a number which incidentally only has to drop by 5% more percent for the BLS to report zero, or even a negative, unemployment rate

 

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Sat, 02/04/2012 - 21:00 | 2127502 Atomizer
Atomizer's picture

Shhhhhhh. Don't tell anyone. Many years ago, I took a sip of his kool-aid. True story. :P

Sat, 02/04/2012 - 21:03 | 2127506 ekm
ekm's picture

Ok, ok..............shshshshshshshshshshshhshshshsh

Sat, 02/04/2012 - 21:24 | 2127524 Element
Element's picture

MISH of course methodically tore it to shreds (although he is also jumping all over the Greek thing today):

http://globaleconomicanalysis.blogspot.com.au/search?updated-max=2012-02...

 

Grossly Distorted Statistics

 

Given the complete distortions of reality with respect to not counting people who allegedly dropped out of the work force, it is easy to misrepresent the headline numbers. Digging under the surface, the drop in the unemployment rate is nothing but a statistical mirage.

 

In January, those "Not in Labor Force" rose by a staggering 1,177,000. Things are much worse than the reported numbers indicate.

 

Any reputable blogger with econ analysis-cred is not just calling this bullshit, but a systematic corruption and abuse of Govt reporting to the public and the markitz ... and yet strangely the main stream media keep lap-dogging to the white hut's baloney and cheese statistics.

 

Zombie govt bitchez.

Sat, 02/04/2012 - 21:21 | 2127528 ekm
ekm's picture

In 1953, labor force participation was 93%. That would be 18% unemployment today.

One question to BLS, who feeds the people who go out of job searching?

Sat, 02/04/2012 - 21:55 | 2127599 Hman
Hman's picture

Blue Pills Bitchez!

Sun, 02/05/2012 - 00:51 | 2127946 derek_vineyard
derek_vineyard's picture

Just as long as top  1/10th of one percent gets wealthier.

Sat, 02/04/2012 - 21:56 | 2127601 dwdollar
dwdollar's picture

After reading these comments I see a few people are still struggling with the math. May I ask, to those mathematically challenged perma-bulls...? What part of the labor participation rate being at a 30 year low do you not comprehend?

Sun, 02/05/2012 - 00:30 | 2127911 ekm
ekm's picture

The answer comes from the 19th century:

"In individuals, insanity is rare; but in groups, parties, nations and epochs it is the rule" – Nietzsche

Sun, 02/05/2012 - 00:40 | 2127929 BlackholeDivestment
BlackholeDivestment's picture

...I love Zero Hedge and the Fight Club with a passion! By the mercy of our Father in Christ I am inspired to express my gaditude and thanks. It is such a blessing to witness people compelled by their love for; truth, freedom, liberty, independence, justice.

Sun, 02/05/2012 - 05:26 | 2128161 Zero Govt
Zero Govt's picture

anyone get the distinct impression the Govt is lying to you anytime their lips move?

..been getting that feeling for years

Sun, 02/05/2012 - 08:21 | 2128247 Clowns to the l...
Clowns to the left_ jokers to the right's picture

It's not as though we haven't experienced population adjustments of this magnitude before. There have been at least two or three other adjustments like this on a numerical and percentage basis in the last 40 years. Hell, go to the FRED data type and dif up the stats for civilian non-institutional population. We experienced adjustments like this almost through the entire decade of the 70's on a percentage basis. The main difference now is, people are paying attention to these anomalies and that's a good thing. We went too long before people started yelling "I call bullshit!" and the more that do, the better.

The thing that cracked me up about Mish's one analysis on the topic was his mentioning that if not for this adjustment, this number or that number would have actually improved. Hel-LO. These "numbers are Fing PEOPLE. They aren't stats, they aren't multipliers or divisors, they're fricking PEOPLE. The numbers would have been better if not for the adjustment? Well, it would have been better if I had quit smoking at 19 rather than 47 but would have means crap after the fact.

Sun, 02/05/2012 - 08:56 | 2128263 overmedicatedun...
overmedicatedundersexed's picture

for the last 3 years we go for dinner in Ocean City Maryland in the winter months..lobster 1.5# for $9.99 the place was always jammed. this thursday we had a party of 7 -I sat facing the door. at 9pm when we got up to leave I got a big shock..as I turned to look over the place we were the only customers there!!

I asked the waitress how things were going this winter: she replied slooow very slooow.

tell me again about the recovery then pull the other leg.

Sun, 02/05/2012 - 09:06 | 2128267 wonderatitall
wonderatitall's picture

a somewhat retarded nutt(ing) a know felator of obama's magikal mysteri toure has me convinced! he of the red phone to obama says all is well and has never been better!

let us give thanks for the pissants of the world, lies(man), nuttjobing and msnbc ,cnbc and all the hot chicks at bloomberg and fox. let us pray for continued good health and another 40 years of our dear leader, batshit "papa doc" obama. may he reign in ....

Sun, 02/05/2012 - 09:54 | 2128307 Village Smithy
Village Smithy's picture

You need to laugh at the Republicans here, they painted themselves into the proverbial corner. They want the market to stay bubbled so they can't really expose this BLS fraud. They are just left to suck on it while Obama gets more and more credit. It has to hurt.

Sun, 02/05/2012 - 12:41 | 2128603 Snakeeyes
Snakeeyes's picture

Funny, The Fed is still using the pre-adjustment numbers. Look at how big the jump is bad numbers is pre-adjustment!

 

http://confoundedinterest.wordpress.com/2012/02/03/unemployment-actually-rose-in-january-media-screams-unemployment-rate-declines-is-increasing-unemployment-something-to-brag-about/

Sun, 02/05/2012 - 12:56 | 2128636 michaelsmith_9
michaelsmith_9's picture

The better than expected Non-Farm Payroll data gave a boost to the markets that will likely continue for the weeks ahead. Forex is a very efficient way to trade and we provide Elliott wave analysis daily for our Premium members.  Try our free 14-Day Premium Membership Trial of Forex Elliott wave analysis and other core markets. More info here: http://bit.ly/AwPPH1 or www.marketoverflow.com 

Sun, 02/05/2012 - 19:58 | 2129518 spencer
spencer's picture

I would like to comment on this subject, because I think it is still unclear to some people.

 

Lets define the basics here:

CV = civilian noninstitutional population = people 16 years of age and older, NOT in the Army and NOT in prison.

LB = Labor Force = civilian workforce, including both the employed and unemployed - aged 16 to retirement at 64.

People not counted in Labor Force include students, retired people, stay-at-home parents, people in prisons, people employed in jobs or professions with unreported income, as well as discouraged workers who cannot find work.

PR = Participation rate = percent ratio of Labor Force and Civilian population = [LB/CV] * 100%

Unemployment rate is INVERSE TO PARTICIPATION RATE.

UN =  Unemployment rate = percent ratio of unemployed people to Labor Force

People not counted in unemployment rate are discouraged workers who cannot find employment.

 

EXAMPLE:

Lets see what happens when we deduct 1 million discouraged workers from unemployed using the numbers provided by BLS in unadjusted portion of the table here:

http://data.bls.gov/cgi-bin/print.pl/news.release/empsit.t01.htm

First we deduct 1 million from unemployed 13,541,000 -> 12,541,000 because the discouraged are removed from the unemployed.

Then we must deduct 1 million from the Labor Force - 153,485,000 -> 152,485,000

Calculating the Unemployment rate = LF/UN*100%=8.22%

The unemployment rate changed from 8.8% as shown in the given table to 8.22%.

Good, we have just improved the number of headline unemployment, but what happened to the participation rate?

PR = LF/CV*100% = our changed (reduced) LF/ THE SAME CV -> Participation DROPS BIG TIME = 152,485,000/242,269,000*% = 62.94%

The table shows 63.4% which means deduction of 1 million discouraged workers from unemployed caused reduction of unemployment rate from 8.8 to 8.22% BUT it also caused the participation rate to drop from 63.4% to 62.94%

 

I wrote all above to ilustrate the mechanics behind manipulation of data and so called unemployment rate headline "improvement".

 

Now let's go and see the numbers in the table:

Unadjusted - Unemployment rate INCREASED from 8.3% in December to 8.8% in January.

Seasonally adjusted - unemployment rate DECREASED from 8.5% in December to 8.3% in January.

Unadjusted - "Employed" DECREASED from 140,681,000 in December to 139,944 in January which is 737 thousands jobs LOST.

Adjusted - "Employed" INCREASED from 140,790,000 in December to 141,637,000 in January which is 847 thousands jobs GAINED.

 

Now let's look what happened to CV - civilian noninstitutional population - because the report includes an important change from December - the number of people in civilian noninstitutional population increased by a whooping 1,685,000 people from 240,584,000 to 242,269,000. Now assuming the correction pertains to normal people - we SHOULD EXPECT the Labor Force to INCREASE by a factor of aproximately 64% of the 1,685,000 because that added number of people MUST BE ENTERING THE LABOR FORCE, right?

The LB SHOULD then increase by aproximately 1 million people right? [64% of 1,685,000 = ~ 1.08 million]

But the LB increased ONLY by 112 000 people!!!

WHY????

Look up the numbers yourself - it changed from 153373 to 153485 = which means it changed only by 112 thousand of people.

It is VERY IMPORTANT.

Manipulating the number of unemployed shows up in unemployment ratio and the Labor Force and then changes the Participation Rate.

So in a normal reporting the falling unemployment EQUALS INCREASING participation rate, while in manipulated statistics falling unemployment EQUALS DECREASING participation rate.

 

Now think about this report AGAIN and AGAIN before you purchase any shares based on that "RAPORT" next week.

Thank you for reading.

 

 

 

 

Sun, 02/05/2012 - 19:59 | 2129519 spencer
spencer's picture

I would like to comment on this subject, because I think it is still unclear to some people.

 

Lets define the basics here:

CV = civilian noninstitutional population = people 16 years of age and older, NOT in the Army and NOT in prison.

LB = Labor Force = civilian workforce, including both the employed and unemployed - aged 16 to retirement at 64.

People not counted in Labor Force include students, retired people, stay-at-home parents, people in prisons, people employed in jobs or professions with unreported income, as well as discouraged workers who cannot find work.

PR = Participation rate = percent ratio of Labor Force and Civilian population = [LB/CV] * 100%

Unemployment rate is INVERSE TO PARTICIPATION RATE.

UN =  Unemployment rate = percent ratio of unemployed people to Labor Force

People not counted in unemployment rate are discouraged workers who cannot find employment.

 

EXAMPLE:

Lets see what happens when we deduct 1 million discouraged workers from unemployed using the numbers provided by BLS in unadjusted portion of the table here:

http://data.bls.gov/cgi-bin/print.pl/news.release/empsit.t01.htm

First we deduct 1 million from unemployed 13,541,000 -> 12,541,000 because the discouraged are removed from the unemployed.

Then we must deduct 1 million from the Labor Force - 153,485,000 -> 152,485,000

Calculating the Unemployment rate = LF/UN*100%=8.22%

The unemployment rate changed from 8.8% as shown in the given table to 8.22%.

Good, we have just improved the number of headline unemployment, but what happened to the participation rate?

PR = LF/CV*100% = our changed (reduced) LF/ THE SAME CV -> Participation DROPS BIG TIME = 152,485,000/242,269,000*% = 62.94%

The table shows 63.4% which means deduction of 1 million discouraged workers from unemployed caused reduction of unemployment rate from 8.8 to 8.22% BUT it also caused the participation rate to drop from 63.4% to 62.94%

 

I wrote all above to ilustrate the mechanics behind manipulation of data and so called unemployment rate headline "improvement".

 

Now let's go and see the numbers in the table:

Unadjusted - Unemployment rate INCREASED from 8.3% in December to 8.8% in January.

Seasonally adjusted - unemployment rate DECREASED from 8.5% in December to 8.3% in January.

Unadjusted - "Employed" DECREASED from 140,681,000 in December to 139,944 in January which is 737 thousands jobs LOST.

Adjusted - "Employed" INCREASED from 140,790,000 in December to 141,637,000 in January which is 847 thousands jobs GAINED.

 

Now let's look what happened to CV - civilian noninstitutional population - because the report includes an important change from December - the number of people in civilian noninstitutional population increased by a whooping 1,685,000 people from 240,584,000 to 242,269,000. Now assuming the correction pertains to normal people - we SHOULD EXPECT the Labor Force to INCREASE by a factor of aproximately 64% of the 1,685,000 because that added number of people MUST BE ENTERING THE LABOR FORCE, right?

The LB SHOULD then increase by aproximately 1 million people right? [64% of 1,685,000 = ~ 1.08 million]

But the LB increased ONLY by 112 000 people!!!

WHY????

Look up the numbers yourself - it changed from 153373 to 153485 = which means it changed only by 112 thousand of people.

It is VERY IMPORTANT.

Manipulating the number of unemployed shows up in unemployment ratio and the Labor Force and then changes the Participation Rate.

So in a normal reporting the falling unemployment EQUALS INCREASING participation rate, while in manipulated statistics falling unemployment EQUALS DECREASING participation rate.

 

Now think about this report AGAIN and AGAIN before you purchase any shares based on that "RAPORT" next week.

Thank you for reading.

 

 

Tue, 02/07/2012 - 07:37 | 2133346 Element
Element's picture

+1 nicely done

Tue, 02/07/2012 - 10:50 | 2133692 spencer
spencer's picture

thank you

Sun, 02/05/2012 - 23:28 | 2129777 ItsDanger
ItsDanger's picture

Jobs# and unemployment rate are useless stats at this pt.  Discretionary income vs gross pay would be useful.  A disturbing trend here in Ontario,Canada is rapid rise of temporary jobs, part time work or hiring only done through agencies.

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