Each month the Government and private organizations release dozens of statistics that help market participants and policy makers judge the health of the economy. The Bureau of Labor Statistic’s monthly Employment Situation Report used to be just another one of these statistics – albeit a high profile one.
Recently, this report has taken on a much greater significance in the market as well as the political arena, and not without reason. High unemployment is arguably the strongest headwind the U.S. economy faces, and many are predicting that the unemployment rate will be the single biggest factor in November’s elections. For those many American’s who can’t find work, any news that employers are hiring again could mean the difference between hope and despair.
But the media frenzy that has recently accompanied these reports can be tough to parse, as observers seem to read whatever they like into the numbers. One important thing to remember is that the unemployment rate is a statistical estimate, which synthesizes many data points in a puzzlingly complex U.S. labor market. As Barry Ritholz, CEO and Director of Equity Research at Fushion IQ, told Yahoo’s Daily Ticker,
“You have a labor force of about 150,000 million and each month 4 million people leave the work force and each month 4 million people get new jobs. Then there’s this slight disparity between these numbers, and that’s the monthly non-farm payrolls that are reported.”
That being said, the number is still a useful and important one, especially when taken in the context of its general trend. Economists are predicting the U.S. will add anywhere from 125,000 to 275,000 new jobs with a consensus estimate of roughly 210,000, and media analysis of what the number might mean is already trickling in. The Employment Situation report will give commenators plenty to chew on and the number will be analyzed through several different lenses. Here are the big questions that are likely to emerge once the data emerges:
What is “full employment” anyway? A big component of the report will be the labor participation rate, or the ratio of the labor force to the adult population. Over at the New York Times Economix Blog, Annie Lowrey stresses this figure, asking the question, “How big should the American labor force be?” If the improving economy has motivated discouraged workers to jump back in the job market, we might not see much improvement in the unemployment rate. However, some believe the recently falling labor participation rate is the result of demographic trends. America’s population is aging, which results in more retired workers as a percentage of the total population. If this is the driving force behind a tumbling labor participation rate, than a healthy jobs number will lead to a commensurate drop in the unemployment rate.
Is a healthy jobs market all in the eye of the beholder? Caroline Blum of Bloomberg warns us against being seduced by analysts who are too nit-picky. She says that those wishing to throw a wet blanket on a good number will argue that everything from unseasonable weather to a reduced labor participation rate are the real drivers of a lower official unemployment rate, not an improving economy. But the general trend of job growth, Blum argues, means that “those arguing that recent job gains — an average monthly increase of 185,000 in private payrolls in the past year — are statistical anomalies have an increasingly wobbly leg to stand on.”
Are we counting correctly? Economists at Goldman Sachs are taking the opposite point of view, however, nitpicking away at the Labor Department’s numbers. According to Reuters, Andrew Tilton, a Goldman Economist, says the Labor Department has made serious errors in it’s seasonal adjustment of the unemployment figure. “We think that the improvement over the last few months dramatically overstates the underlying improvement,” says Tilton. “You will not see that rate of improvement going forward.” Reuters goes on to argue that this dynamic could spell big trouble for President Obama’s reelection chances, as he may be counting on a visible downward trend in the number going into November.
This diversity of opinion pales in comparison to the cacophony we’ll hear tomorrow. Hopefully, for the American economy, we’ll see a nice, big gain in jobs, but remember to take whatever number the Labor Department posts, and whatever reaction it engenders, with a grain of salt.