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Craig Allen: Unemployment Data Boost Markets, but Closer Inspection Reveals Some Cause for Concern

Latest jobless figures don't quite add up to a complete picture of labor statistics

By Craig Allen, Noozhawk Business Columnist | @MPAMCraig |

This past week, the two key labor statistical reports — from ADP and the Bureau of Labor Statistics — showed impressive improvement in the labor market. These reports drove stocks to strong gains for the week, with the NASDAQ setting an 11-year high. But if we dig a little deeper into the data, we find that all is not what it seems.

On Feb. 1, ADP (Automatic Data Processing) released its monthly jobs report, which showed 176,000 jobs added for the month of January. Stocks rallied — with the Standard & Poor’s 500 adding 12 points that day— as the positive reaction to the data helped overcome some other not so bullish economic data. Two days later, the BLS report showed 234,000 jobs added in January. That announcement spurred an even greater jump for stocks, with the Dow gaining 156 points, the S&P 500 up 19, and the NASDAQ surpassing the 2900 mark and closing at 2,905, an 11-year high. The NASDAQ has not been at this level since before the tech bubble burst in early 2000.

Each and every week we receive multiple reports on the economy — from labor statistics, to Gross Domestic Product growth rates, to housing-related data, and scores of other reports on every facet of our economy. Some hold more weight than others, but all are watched closely by market participants to try to understand the future direction of the economy, and the impact that direction will have on asset values. The problem faced by professionals like myself and individual investors is trying to understand how these statistics are calculated, and then what all of this information really means in terms of its impact on the financial markets over the short-, intermediate- and long-terms.

Last week’s labor reports are no exception. And, like all of the statistics we receive on a weekly basis, the process of calculating these data points can be involved and challenging. If we burrow into the latest BLS labor report, we find that although there was an increase of 234,000 jobs in January, and job growth was widespread in the private sector with large employment gains in professional and business services, leisure and hospitality, and manufacturing, there were some concerning adjustments that were made to arrive at that figure.

First, the BLS has adjusted its labor force data to reflect the change in population in the 2010 census from the 2000 census.

This adjustment resulted in an increase in the estimated size of the civilian noninstitutional population in December by 1,510,000, the civilian labor force by 258,000, employment by 216,000, unemployment by 42,000, and persons not in the labor force by 1,252,000. Although the total unemployment rate was unaffected, (now at 8.3 percent, down from 8.5 percent in December and down 0.8 percent since August), the labor force participation rate and the employment-population ratio were each reduced by 0.3 percentage points. This was because the population increase was primarily among persons 55 and older and, to a lesser degree, persons 16 to 24 years of age. Both these age groups have lower levels of labor force participation than the general population.

This decrease in the participation rate, in plain English, means that they basically removed 1.5 million people from the calculation of the jobs data because a large percentage of the increase in population between 2000 and 2010 comes from people over 55 or younger than 24. I would submit to you that there are a very high number of people aged 16 to 24 and 55 and older who need to work to afford to live. By removing 1.5 million people from the calculations, the government has basically padded its numbers to make them look stronger than they actually are. Basically, the BLS is saying that there were 1.5 million fewer people out of work and looking for a job in January than December, based on the change in population data from the 2010 census. For any of those 1.5 million people who didn’t find a job in January, they are just as unemployed, and just as in need of a job today as they were in December, but they are not being counted anymore.

Most professionals and many individual investors understand that all data must be calculated with imperfect inputs and that many assumptions must be included in the formulation of these data. We need statistics to track progress over time. No matter how unreliable they may be, it is still better to have an imperfect data set than none at all. Investors should be careful not to place too much weight on any of these statistics, however, since they are often calculated with questionable methods, unreliable inputs and changing formulas making comparisons to historical data spotty at best.

Craig Allen, CFA, CFP, CIMA, is president of Montecito Private Asset Management LLC and founder of Dump Your Debt. He has been managing assets for foundations, corporations and high-net worth individuals for more than 20 years and is a Chartered Financial Analyst (CFA charter holder), a Certified Financial Planner (CFP) and holds the Certified Investment Management Analyst (CIMA) certification. He blogs at Finance With Craig Allen and can be contacted at .(JavaScript must be enabled to view this email address) or 805.898.1400. Click here for previous Craig Allen columns. Follow Craig on Twitter: @MPAMCraig.




comments powered by Disqus

» on 02.06.12 @ 01:42 AM

Thanks Craig for the explanation. If the BLS changes the assumptions used to arrive at the unemployment statistics, I don’t see how one can reliably compare unemployment numbers from month to month. These numbers only make sense if we can ascertain the rate of change each month, an endeavor not worth doing if they are making wholesale changes to the underlying assumptions.

» on 02.06.12 @ 03:07 PM

This article is apparently based on worse assumptions than those used by the BLS.

“I would submit to you that there are a very high number of people aged 16 to 24 and 55 and older who need to work to afford to live.”

Submit? People 16-24 are much more likely to be supported students than people “who need to work to afford to live” like people 25-55. Those 55 and older are much more likely to be semi-retired.

Oh! Wait! I get it! The numbers cannot be improving, because Obama might get some credit! Ahhhhh. Thanks, Craig.

» on 02.06.12 @ 03:39 PM

Anyone who would like to see the other side of this FoxNews propaganda should follow this link to a article that debunks most if not all of what has been put forth in the above article as truth. http://www.dailykos.com/story/2012/02/06/1062227/-Fox-cooking-the-books-on-jobless-numbers?via=siderecent

» on 02.06.12 @ 04:16 PM

You miss the point, Rambler, whatever the numbers of people 16 to 25 and 55 and over that are participating in the workforce, changing it by an order of magnitude this month to push down the unemployment rate makes the whole enterprise suspect. Interestingly, if you do not reduce the labor force by arbitrarily dropping people, the unemployment rate would be 8.9% and the underemployment rate would be over 15%.

I would wait a little while before throwing bouquets to Obama.

» on 02.07.12 @ 01:28 PM

This kind of manipulation by government happens all the time. It is no surprise. Every president has done it in campaign mode since I can remember my father complaining about in the sixties. What Craig is attempting to do is dig through the propaganda and get to the real numbers. However unless we look at what types of employment are actually growing, even if the numbers are rosy it’s meaningless. Like I said in a previous article, the government can manipulate the “hard” numbers by stimulus spending. It means nothing in the long run if all the jobs created are sucking more wealth than they create.

Cranky, disavowing one biased source with a far worse one is stupid. You couldn’t find a more objective site?

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