03 February 2012

The Non-Farm Payrolls Report: Air Brushing History - Nominal Work Force for Nominal GDP

Back in Stalinist Russia, they had whole departments of people that were responsible for rewriting history and documents in order to support the latest Party lines.

When a particular person fell out of favor, for example, they not only altered the documents, but even went so far as to air brush them out of important historical photographs.

Today the US reported a remarkably high Non-Farm Payrolls number, well in excess of even the most optimistic estimates. 243,000 jobs added, and unemployment has dropped to only 8.3 percent. Isn't that good news indeed.

If one tracks the data closely, and keeps their own copies of the records, what we see instead are revisions, sometimes going back as far as ten years, that most greatly affect the 'seasonally adjusted' numbers, but also affect the raw numbers as well.

The Obama Administration, as well as the previous Administration, have been going back and tinkering with history, rewriting the numbers here and there, in most cases 'rolling jobs forward' to the current months to make the current headlines look better.

The BLS keeps the digital copies of this and they are duly adjusted of course. But what was surprising in this latest round is that for the first time in my memory they went back and adjusted the Birth-Deal Model, which are imaginary jobs in the first place! And on the web site that I usually check they have stopped providing all the historical data, limiting it to what looks like a year or two of data.

What can one do when the statistics are questionable like this? One common touchstone for those who rely on data is to compare one set of numbers with another, or even with 'real things.' If the sales numbers look great, but unsold inventory is piling up, chances are pretty good that somewhere those sales reports might be disconnected from reality.

One real check I prefer is the Labor Participation Rate. The Census is pretty good about counting the number of people and estimating their growth within some reasonable statistical error. And people do not tend to disappear in large numbers, at least not yet.

Labor Participation is simply the number of people who are working or are unemployed as a percentage of the civilian non-institutionalized population over the age of 16, or simply number of people of working age who are not in prison, etc.

So if the number of people working is increasing and the number of unemployed are decreasing the participation rate *should be increasing* one would think, given the relatively stable growth of the population.

But we instead see that the Labor Participation Rate continues to decline. I am sure the spokesmodels will find some way to try to gloss over this.
Note: The spokemodels and the uninformed parrots quite predictably are tut-tutting this using misdirection by saying that the most recent drop for January alone is attributable to a revision in the Labor Force, the denominator in this case, by the Census Bureau. And I accept that. No problem. But my point again is not to look at a single month, but at the trend, even for this. And from a technical standpoint, the trend here undeniably 'blows.'
If the Fed can target a Nominal GDP, that is, economic growth targets that do not care how much is real and how much is paper manipulation, then I am sure it is only fair for the government to target a Nominal Work Force.

As you know, I do not like to look at these monthly numbers in the first, place, but they are integral to the Wall Street shell game, and the politicians love to play it for the headlines as well.

A more rational approach is to watch the trending average over some reasonable period of time, and to look at multiple sources of data, given the propensity for politicians to stick their fingers in the process.

The problem I have with painting the tape, accounting fraud, and the statistical manipulation of the numbers is that these numbers are the foundation for serious policy decisions. Making January 'look good' is going to make it all the more difficult to take the appropriate political steps to reform the economy and get it working again.

But the Yanks are notoriously short term oriented in their thinking. And this is an election year, and emotions are running high.

I cannot help but think that if the government is finally able to fully digitize money and other assets, all this airbrushing can become so much more simple. Just ask the customers of MF Global. One day you own Treasuries, and even solid bars of gold and silver in your own name, and the next day, poof, they're vaporized. Sorry don't know where they went. Go stand over there in line by the Lost and Found and see what happens.

And so I think we are not in Kansas anymore, Toto. It is looking more like Moscow on the Potomac every day.

Here is a comparison of the Seasonally Adjusted Jobs Numbers before and after the Revisions. Keep in mind that each square represents 100,000 jobs, so even slight changes make a big difference in the headline number which just shows the month over month change.

Again, the point is not that there is some conspiracy, which is how many easily dismiss this, especially the uninformed who want to appear to be 'sophisticates.' Rather it is mean to show that one months data is relatively useless and often misleading, and subject to significant revisions sometimes much later. It is the TREND that matters.