Which Employment Report is Correct?

Freedom Financial Archive | Originally posted Nov 09, 2022

The US jobs market is showing some different signals we want to look at in terms of which one matters most as we go forward.

There is a lot of disconnect between what the non-farm payroll is showing and what the household survey is representing.

Essentially, the NFP is starting to look a bit odd.

Households are saying there’s been no employment growth since March of this year.  Over the same period, non-farm payrolls show an increase of 2.5 million.

In the past, there have been disconnects.  But this is one of the largest we’ve had and we’re not sure when we’ll get a makeup number.

It’s important to understand the definition of each metric and how it’s calculated.

Employment estimates from the payroll survey are a count of jobs, while the household survey provides an estimate of the number of employed people.

If a person changes jobs and is on the payrolls of two employers during the same reference, both jobs would be counted in the payroll survey estimates.

On the other hand, the household survey will simply reflect one employed person in its measure.

In periods of high employee turnover, accepting buyouts, or being laid off and getting a new job quickly, you can see months with more double counting versus what’s usual.

This isn’t a perfect science, as each one uses different metrics to measure what the actual employment is per household.

Given the drop in participation rate, it seems that it is likely that we’ve had employment closer to the household survey than the steady increase on the non-farm payroll side.

As with most things, the answer probably lies somewhere in the middle – especially when you look at what the regional fed data has been showing us.

There, we’ve been seeing a decline in both workweek and employment.

ISM Services PMI

The below data point shows that ISM services have seen employment move into contraction over the last month.

Obviously, things have been very volatile given the way the market has reacted, but you can see that the trend has been lower over the last few months.

The ISM surveys non-manufacturing (or services) firms’ purchasing and supply executives. The services report measures business activity for the overall economy; above 50 indicating growth, while below 50 indicating contraction.

When we look through our history you can see that there’s always been a disconnect between nonfarm payrolls and the household survey.

It’s another reason that we like to look at the six-month average when comparing the two. That’s because typically you have these balance out over time.

Like June and April of this year, we’ve seen another divergence in October between nonfarm payroll and household survey metrics, with the household survey going negative.

Birth/Death Model

Another odd component is the disconnect between the birth/death model which estimates births and deaths of businesses was plus 455,000 last month.

Credit: U.S. Bureau of Labor Statistics

If we just consider the recent headlines of META, other tech entities, as well as financial institutions laying off workers it’s unlikely that we have seen this kind of expansion.

Non-Farm Payrolls Vs Households Over Time

The chart below shows the six-month cumulative non-farm payrolls was + 2.08 million, while households showed only up 500,000.

As you can see below, even when we go back an extra month, there’s still a broad disconnect between the non-farm payrolls and the household survey.

The chart above includes the first decline in this cycle (April) for household survey employment.

Typically, non-farm payrolls are a poor way of tracking trend changes while typically the household survey has been better at showing pivots and the underlying numbers.

You can see in the chart below that the household survey greatly outpaced the non-farm payrolls at the very beginning and now we are seeing the opposite to the downside.

Non-farm payrolls are labelled in the chart below as the “Establishment Survey” because that’s what most Wall Street traders pay attention to.

Even if you factor in the lower household survey, the jobs market remains robust given what the economic data tells us.

The Cost of Labor

Another important point is the unfriendly trend for non-farm productivity and unit labor costs.

The below chart looks at the six-month annualized percent change for non-farm productivity and labor costs.

This is one of the worst shifts that we’ve seen since the great financial crisis and before that you must go back to the 1980s.

Productivity has diminished while unit labor costs have exploded putting additional pressure on corporations.

The above divergence also starts to materialize when there is growing stagnation in the underlying economy.

We’ve started to see unit labor costs come down.  While still expanding, they’re expanding at a slower rate.

Even at their peak it was never enough to cover the rising inflation and living expenses workers are facing.

Some of this is showing up in slower growth in average hourly earnings when you look at the wage metrics from the Atlanta Fed.

This chart shows that wage growth has slowed even as inflation continues to grind higher.

Another key factor is employment diffusion or the breadth of industries creating jobs has eased back to the long-term average.

This is not something that is a concern yet.

But you can see that the drop has been drastic and based on what companies have announced will only continue to worsen.

The overarching concern remains the drop in US labor force participation rate, showing a shift in the demographic as well as people who remain unwilling to go back to work.

As productivity stays depressed and the amount of people participating in the workforce diminishes, wages will have staying power at an elevated level.

With wages stuck higher, we’ll see companies trying to offset the additional cost by keeping their prices elevated.

This is just a long way of saying stagflation is here and only becoming worse.

Kind regards,

Freedom Financial News