Last Friday’s headline payroll number was a bad one when viewed on an absolute basis, but it was much better number than expectations (-345,000 actual job losses in May vs. -520,000 expected). As one picks through the report, there appears to be a little something for everyone. The bears can hold onto an unemployment rate of 9.4% (with the comprehensive U-6 version over 16%), a workweek that is at all-time lows, average hourly earnings that are at the worst levels since 2005, and a household survey that was even worse than the establishment survey that garnered the headlines. The bulls, on the other hand, should be quick to point out that the jobs number was the best since late last fall, that most components are showing considerably smaller losses than the average for last year, that both March and April losses were revised down (which breaks the downtrend), that temporary and retail employment (which are usually leading in their nature) were up, and that the unemployment rate is always a lagging indicator that will be viewed by markets in the rearview mirror.
One of the oddities buried within the payroll report is something called the CES Net Birth/Death Model. It’s a statistical model that was created to reduce a known source of sampling error within the report. The payroll survey can’t capture on a timely basis changes in employment generated by either new or terminated businesses due to the time lag between businesses being created and destroyed, and the time it takes for them to be included in the survey. To adjust for this flaw, the Bureau of Labor Statistics, which is the government agency responsible for tracking employment data, developed a model to approximate how many new businesses were created (birth) or destroyed (death) each month. The latest report showed 220,000 of these jobs were created during May (see chart below), which is the highest ever in the month of May. Bears and conspiracy theorists have been pointing out that these birth numbers at best fly in the face of common sense, and at worst are an attempt by the government to cover up how bad the job market really is. The bulls would say that for all the quirks and flaws in this report, perhaps the only message that matters is that the labor market appears to be stabilizing along with credit, housing, and the overall economy. There is a saying that that beauty is in the eye of the beholder, and I guess the same is true of the latest employment report…
Source: Bureau of Labor Statistics
