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Executive Summary

The Jobs Report released last week reported 943,000 new jobs, and the markets and media celebrated.  What the headline did not reflect was the actual loss of 133,000 jobs, which then was seasonally adjusted (part of the calculation) to arrive at the nearly one million new jobs.  When one looks at the labor force participation rate, one can see (second graph below) the employment situation is far from resolved.  Also, the JOLTS report indicated over 10 million job openings.  However, due to regular state unemployment benefits along with the soon-ending Federal supplemental benefits, employers cannot find employees who want to work.  As always, I try to provide analysis to share with our readers the real picture. 

Please proceed to The Details for my full analysis.

“It’s easier to fool people than to convince them that they have been fooled.”
–Mark Twain

The Details

Last week, the Bureau of Labor Statistics (BLS) released their July Employment Situation report often referred to as the Jobs Report. This report is based upon two surveys. The new jobs created number is derived from the Establishment Survey, and the Unemployment Rate is calculated from the Household Survey data. Financial media were thrilled to read that 943,000 new jobs were created in July. Of course, these numbers are influenced by factors not normally present. The impact of COVID19 and the effect of extended unemployment benefits, often resulting in higher income than when recipients were working, have resulted in numbers not easily deciphered and even harder to “seasonally adjust.”

How do you turn a loss of 133,000 jobs into a gain of 943,000? Simple, you apply seasonal adjustments. As can be seen in an excerpt from the Jobs Report below, actual non-seasonally adjusted employment fell by 133,000 jobs. However, after applying seasonal adjustments, voila, almost one million new jobs are created.  

Seasonal adjustments are just one “adjustment” applied to survey results. Another is the Birth/Death adjustment. This is explained as follows from the BLS report, “…monthly establishment survey estimates include an adjustment to account for the net employment change generated by business births and deaths. The adjustment comes from an econometric model that forecasts the monthly net jobs impact of business births and deaths based on the actual past values of the net impact that can be observed with a lag from the Quarterly Census of Employment and Wages. The establishment survey uses modeling rather than sampling for this purpose because the survey is not immediately able to bring new businesses into the sample.”

I always joke about “econometric modeling” stating if you tell me what outcome you desire, I can build a model that will get you there. Canadian educator Laurence Peter once stated, “An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.” The point is things are not always as they seem or as the headlines state.

For instance, with all the hoopla over the Jobs Report and 5.4% “official” unemployment rate, many believe the employment situation is resolved.  However, the graph below illustrates it is far from resolved. The labor force participation rate, the blue line below, remains far below the pre-pandemic level, which remains far below the pre-Financial Crisis level. Yet the unemployment rate, orange line below, is almost back to full employment.

Seen another way, the graph below overlays the labor force participation rate (blue line) with the private employment-to-population ratio. Both ratios highlight levels remaining far below pre-COVID19.

At the same time, the BLS released their JOLTS report (Job Openings and Labor Turnover Survey) today indicating there are 10.1 million job openings. The logical explanation is that pandemic supplemental unemployment benefits combined with regular state unemployment benefits are so generous many choose not to work. While many states have terminated the Federal supplemental benefits leaving only state benefits, the Federal program ceases for all states on September 6. At that time, I expect a huge shift from unemployed to employed. That is if the Federal government does not extend the supplemental benefits.

Unless one digs into the actual Employment Situation Summary report and analyzes the exogenous events impacting the jobs market, one might believe the simplicity embedded in the new jobs and unemployment rate headlines. Well known economist, David Rosenberg, stated via Twitter,

“Strip out the fictitious return of teachers (thank you BLS seasonal maladjustment) and the ongoing surge in low-skilled leisure/hospitality workers, there was nothing much going on with that July jobs report. Does anyone do analysis any more or do they just report the headline?”

It is expected that employment should soar in the next couple of months due to the effect of expiring Federal benefits.  This should give employment a significant boost. Yet the facts are clear that the employment situation has a long way to go to reach “full employment.”

The S&P 500 Index closed at 4,437 up 0.94% for the week.  The yield on the 10-year Treasury Note rose to 1.29%.  Oil prices fell to $68 per barrel, and the national average price of gasoline according to AAA rose to $3.19 per gallon.


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© 2021. This material was prepared by Bob Cremerius, CPA/PFS, of Prudent Financial, and does not necessarily represent the views of other presenting parties, nor their affiliates. This information should not be construed as investment, tax or legal advice. Past performance is not indicative of future performance. An index is unmanaged and one cannot invest directly in an index. Actual results, performance or achievements may differ materially from those expressed or implied. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy.

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