Jobs: As Good as They Seem?

Bloomberg is reporting, “U.S. April Payrolls Rose 138,000”:

“Employers in the United States added fewer jobs than expected last month, and wages jumped by the most in almost five years, government figures showed today. The unemployment rate held at 4.7%.

“The 138,000 gain in payrolls for April followed a revised 200,000 increase the month before and was the smallest increase since October, the Labor Department reported today in Washington. Average wages were up 3.8% from April 2005, the biggest gain since August 2001.

“The slowdown in hiring suggests record gasoline prices, and rising borrowing costs are forcing companies to rein in costs to maintain profits. Hourly earnings increased as factories, which tend to pay higher wages than service providers such as retailers, added the most jobs in almost two years. Retail employment dropped by the most since September.

“‘Average hourly wages are rising but it’s because of the shift’ in demand for employees in higher-paying jobs, Anthony Chan, chief economist at JPMorgan Private Client Services in Columbus, Ohio, said before the report.

“Economists expected payrolls to rise by 200,000, according to the median of 71 forecasts in a Bloomberg News survey, after an originally reported 211,000 gain in March. Estimates ranged from increases of 165,000 to 250,000. Economists at Stone & McCarthy Research Associates in Princeton said a typical range between the low and high forecast is about 150,000….

“The labor force participation rate, which measures the percentage of the working-age population that is employed or seeking employment, held at 66.1% for a third month, today’s report showed.

“Federal Reserve Bank of Atlanta President Jack Guynn said on May 1 that there is ‘little if any measurable correlation between tight labor markets and inflation.’ The central bank’s interest-rate policy is ‘very close’ to a level that’s ‘properly calibrated’ to the outlook for moderating economic growth, Guynn said.”

Perhaps the reason why there is ‘little if any measurable correlation between tight labor markets and inflation’ is because the job numbers are pure fiction. Then again, one sure can make a case that the inflation numbers are pure fiction as well. What I want to know is if anything the government reports can be believed.

Birth/Death Model

Following is a chart of jobs that were not measured but “assumed” to have been created for each month in 2006. For those not familiar with “assumed jobs,” it works like this: The government has a “birth/death” model that says at this stage in a recovery, many new businesses (as opposed to people) are being created that are not yet in our actual survey, so we “assume” such and such number of jobs were created as a result. Then twice a year, the government adjusts those numbers (almost always downward), taking back some of its original silly assumptions. The methodology is explained here, and following is the chart.

One can see that 193,000 jobs were subtracted from January assumptions (or previous lies, whichever you prefer), but 271,000 jobs were added in April. Given that only 138,000 jobs were created as shown in the opening paragraph of this blog, one might think that it would be easy to say that we really lost 133,000 jobs in April (138,000 reported minus 271,000 assumed). Unfortunately, it is more complicated than that (perhaps on purpose), because one set of numbers is seasonally adjusted and the other is not. Sheeesh!

Anyway, the numbers in the table above show 271,000 jobs were assumed by the government to have been created in April. Let’s take a look at some of the more suspect numbers in those assumptions.

Construction Jobs

Supposedly, construction added 36,000 jobs not captured by official reporting.

Now, this is in spite of extremely weak reports from Toll Brothers, Hovnanian, and Centex.

I reported on this in Dwindling Speculators, Dwindling Jobs. Reuters is reporting, “Toll Brothers Second-Quarter Orders Drop 32%”:

“Toll Brothers Inc. on Friday cut its forecast for the number of homes it expects to sell in fiscal 2006, as quarterly orders fell 32%.

“The decline in orders reflects softening demand and a build-up of homes on the market, especially by speculators who are unloading their investments as their anticipated profit evaporates…

“‘Speculative buyers are no longer fueling demand,’ Robert Toll, chairman and chief executive, said in a statement. ‘Instead, they’re putting the homes they’ve recently acquired back on the market, or are canceling contracts in mid-construction.'”

In “McCabe Research April 2006,” I reported that although McCabe Research specializes in Florida and the Southeast United States, CEO Jack McCabe is telling me of cancellations and lawsuits in Las Vegas, San Diego, Chicago, Boston, New York and Los Angeles.

The L.A. Times can back some of that up with an April 30 article entitled, “High Rollers Are Folding in Sin City”:

“First, the Icon Las Vegas was derailed, then the Hard Rock Hotel and Casino expansion, and now the Curve. What’s up with Sin City’s luxury high-rise condo market?

“In the last several months, at least seven marquee Las Vegas condo projects have either been canceled or put on hold, causing a dust storm of rumors to swirl through the city and elsewhere as investors wonder if this is a harbinger of a slowdown. The reasons for the projects’ retreats don’t bode well for the larger picture: lack of buyer interest and escalating land, construction and labor costs.”

On May 2, SmartMoney.com reported, “Hovnanian Warning Spells Trouble for Builders”:

“Hovnanian on Monday cut fiscal second-quarter and 2006 earnings guidance and said it plans to take writedowns in connection with falling land values as the company struggles with a faster-than-expected drop in the housing market…

“Hovnanian cited a surge in cancellation rates, a slowdown in demand, delays in certain deliveries, building material price increases, and heavier use of incentives and discounts for the weaker earnings outlook.

“‘Our anticipated results for our second quarter and the remainder of fiscal 2006 reflect smaller year-over-year increases in earnings than we had anticipated,’ president and chief executive Ara Hovnanian said in a statement. He noted that orders plummeted 20% in the company’s fiscal second quarter.

“Wachovia Securities analyst Carl Reichardt said that 20% order decline was far worse than the 5% increase he had been expecting.

“‘Hovnanian is the first builder to report a quarter than includes April orders (since its fiscal quarter ended April 30), perhaps demonstrating that April continues to be weak,’ said Reichardt.”

Given that homebuilders are collapsing, does it make any sense for government models to be adding 36,000 construction jobs?

Financial Jobs

I also see that the BLS added a mythical 19,000 financial jobs. Does that compute with “Ameriquest’s Owner Lays off 3,800”?:

“The parent company of Ameriquest Mortgage Co. and Town and Country Credit laid off 3,800 workers nationally at retail mortgage subsidiaries and closed 229 branch offices yesterday.”

Does it make much sense to assume extra financial jobs when companies like Washington Mutual and Ameriquest are closing offices and getting rid of thousands of employees, or with companies like Merit, a subprime lender going bust and firing everyone, as I reported on Friday?

Leisure and Hospitality Jobs

On that note, the telepathic question lines are now open.

Hmmmm. It seems that enquiring minds are wondering about the 85,000 leisure and hospitality jobs assumed by the BLS. That, of course, is a very good question.

For a solution, please consider consumer credit. Just released on May 5 (so the data are somewhat stale) is this Dow Jones report that “Consumer Credit Expanded $2.5 Billion in March”:

“U.S. consumer credit reached a record high in March, but grew at the slowest pace since November, the Federal Reserve said Friday.

“Consumer credit outstanding rose about $2.5 billion in March, to $2.161 trillion, according to the latest report from the Fed. That followed a $4.5 billion consumer credit increase in February, previously estimated as a $3.3 billion expansion.

“March credit expansion was less than Wall Street estimates that consumer credit had expanded $4.1 billion during the month.”

Let’s see if I have this correct. Credit rose $2.5 billion but was expected to rise $4.1 billion. It seems to me as if consumers are attempting to rein in discretionary spending. Also remember that gas prices (often charged) have been soaring. So once again, we have a number that does not make much sense, at least to me.

Please consider the Dow Jones news report “Applebee’s: 5% of Casual-Dining Sector’s Patrons Gone”:

“Applebee’s International Inc., which continues to suffer from guest-count declines, said its research indicates that about 5% of the category’s usual customers have stopped patronizing casual-dining restaurants in recent months.

“The largest chain in the grill-and-bar segment, Applebee’s attributed that drop-off primarily to economic factors…

“After seeing a temporary lift in traffic early in the year, figures for March and April fell again as ‘gas prices and other macroeconomic conditions reared their ugly heads,’ President Dave Goebel said on a conference call.

“The company also predicted a slowdown in new-store development by many in the industry next year. Several analysts have been arguing for months that casual-dining is overbuilt.

“‘We’re more stingy on approving sites than we ever have been, based on the macro environment,’ said chief financial officer Steve Lumpkin.”

Of course, it is silly to point to a single chain as a systemic problem, but the general complaint made by Applebee’s seems to run true (at least to me): overbuilt sector, rising gas prices, predicted slowdown in growth. Not only is this a warning bell for leisure and hospitality jobs (for which 85,000 were just assumed), it also says something about construction jobs.

Can it be that the “Hurricane Stimulus” has run its course? Can it be a last-ditch effort by builders to finish projects before all hell breaks loose? Can it be that that the numbers are just plain fallacious?

Manipulating the Masses

On the latter note, please consider the Daily Reckoning article “Manipulating the Masses”:

“If you believe the government, annual inflation is running less than 3.5%, unemployment is less than 5%, annual GDP growth is about 3.5%, and the 2005 federal deficit was $318 billion.

“In reality, however, annual inflation is over 8%, unemployment is around 12%, and annual GDP growth is flat. Not only does common experience support the latter set of numbers, but also taking a close look at how government economic reporting has been manipulated over time. What will surprise many, though, is that the annual 2005 federal deficit was $3.5 trillion (not billion). That extraordinary number is as reported by the U.S. Treasury, using generally accepted accounting principles…

“For several years, I conducted surveys among business economists as to how they viewed the quality of government economic data. The following were actual comments:

“The senior economist of a major retail company told me, ‘Quality varies. The retail sales numbers are terrible, but money supply data are great.’

“The senior economist at a major bank offered, ‘There’s a problem with money supply, but I think retail sales are pretty good.’

“The point is that when an economist knows a sector well, he also recognizes the limitations and distortions of related economic reporting.

“Gathering and reporting accurate information on a timely (one-month) basis for components of the U.S. economy is nearly impossible. Nonetheless, most career government statisticians in Washington work diligently to provide the best information possible within the limits of the existing reporting system. A number of reporting distortions, however, are not accidental.

“The popularly followed economic series are subject to two forms of manipulation. First is the event-driven alteration of data, where specific employment numbers, for example, are massaged to help political circumstances. Such is the nature of what appears to be happening at present, with presidential approval ratings doing some historical bottom bouncing.

“The second type of manipulation is more insidious, though, where reporting methodologies are altered so as to build reporting biases into a series.

“Changes in CPI weighting methodology during the Clinton administration (and as proposed by the earlier Bush administration), for example, were designed to understate the CPI so as to cheat Social Security recipients out of some of their cost-of-living adjustments. That purpose was espoused particularly by former Fed Chairman Alan Greenspan.”

Gross Distortions

The bottom line is that every number from the government is suspect from the start. The meanings of GDP, unemployment, deficit spending, etc., have all dramatically changed over time. If we computed the CPI or unemployment the way we did 20 years ago, the numbers would look dramatically different. In addition, off-book reporting of military spending and entitlements has dramatically increased over time.

The answer to the original question should be easy enough by now: No. Job numbers, as well as any other statistics reported by the government, are likely nowhere near as good as reported. Then again, perhaps you believe in the CPI, perhaps you still believe Rumsfeld when he said “We know where they are,” and perhaps you still believe in the Tooth Fairy or the fairy tale mushroom cloud story presented by Condoleezza Rice.

The government lies for one of two reasons.

1. They think they can get away with it.
2. You can’t handle the truth.

Regards,
Mike Shedlock ~ “Mish”
May 8, 2006