The Most Ridiculous Seasonal Adjustment You Will Ever See

Moments ago, in an attempt to put some lipstick on what as we previously showed was a very poor ISM (and Markit) Service PMI, Goldman focused on the only silver lining it could find: employment. This is what Goldman's Kris Dawsey just said: "However, employment continued to rise to a very strong level (+1.1pt to 59.6). The employment index now stands close to the series high of 60.2 set in August 2005, a favorable indicator for Friday's employment report. Prices paid moved down (-3.1pt to 52.1), mirroring the decline seen in the ISM manufacturing report released earlier this week. Despite the headline miss, today's ISM nonmanufacturing report is consistent with a solid pace of expansion in service sector activity. "

Which, if one looks at the (seasonally-adjusted) history showing the Institute for Supply Management's Service Employment data, would make perfect sense: it is indeed near record highs.

Surely that last leg, showing "Employment" soaring in 2014 has nothing to do with the mid-term elections, and is fully rooted in reality, right.

Well wrong, and not just because said elections showed how Americans feel about the real, not fake, economy.

Because sadly for ISM's attempt to endlessly manipulate the data, for Goldman's endless attempts to spin the data, and most of all, for the US worker, who despite pretty charts showing otherwise, still can't find a well-paying job and showed his feelings during yesterday's election, here is what really happens.

Every month a number of respondents are asked how they see the employment situation in real-time, unadjusted. They are given three simple choices:

  • Higher
  • Same
  • Lower

The final employment index is tabulated by taking the average of the Higher and Same prints, and then applying a seasonal adjustment factor to the result to obtain the final number, which is shown in the blue lines above and below.

There is a small problem, however, because of all the data noted above, the most important, if not only, thing that matters is how many respondents see "higher" employment. Everything else is a math formula and a fudge factor.

So what does the actual data look like?

In the chart below we have shown the progression of the "Higher" responses over the past year. As of October, only 22% of respondents saw a pick up in employment, 67% responded "Same" and 11% expecting "lower."

Long story short, 22% was the lowest print since April.

In other words, what happened in October is that an unadjusted response which indicated the weakest labor market in half a year, was magically transformed into almost the best print in the history of the Employment series.

How?

Seasonal Adjustments. Unfortunately, Americans don't have the option of paying with "seasonally adjusted" money they don't have, in compensation for a "seasonally adjusted" job they don't hold.

Is there any wonder then that yesterday's Midterm election result - a furious popular repudiation of Obama's fake economy - was what it is?