Jobless rate drop no surprise, despite political racket

8:30 AM despitepolitical, jobless, nosurprise, racket No Comments

The news Friday that the unemployment rate fell sharply to 7.8 percent just one month before the next presidential election heartened some observers and shocked others.

When you turn down the volume on all the political noise surrounding the report, however, what comes through is that the U.S. economy remains locked in a period of slow, steady job growth.

“It’s consistent with a slowly improving labor market where a few extra people are coming into the labor market,” said Joel Naroff, economist with Naroff Economic Advisors.

To understand why many economists might have that reaction, it helps to look at how the Bureau of Labor Statistics calculates its job market data – and why economists pay much more attention to long-term trends than the month-to-month changes that tend to dominate political rhetoric.

The unemployment data comes from two sources.

The first is a representative household survey of about 60,000 American households, which is conducted monthly.

The researchers count people as employed if they have worked in the past week, and they are considered unemployed if they haven’t worked but have actively looked for work in the past four weeks. The unemployment rate is not calculated based on who is collecting unemployment benefits.

The household survey, from which that 7.8 percent unemployment rate was calculated, is considered valuable because it includes self-employed people and others who might not show up in the payroll survey.

That’s the second source of data for the unemployment report. It’s compiled from a survey of about 141,000 businesses and government agencies, which account for about one-third of all nonfarm payroll employees.

That’s the data that is used to calculate the payroll figure, which in Friday’s report showed that nonfarm payroll employment rose by 114,000 in September.

The Bureau of Labor Statistics takes great pains to warn people that only relatively large changes in each set of data are considered statistically significant. For the payroll survey, a change of about 100,000 is considered statistically significant, and for the household survey a statistically significant change would be about 400,000, according to the BLS.

“The labor force numbers do bounce violently around,” Naroff said.

For example, Naroff noted, the civilian labor force grew by 418,000 in September, but it shrank by 368,000 in August. If you look over a long period, the trend is much more stable, with slightly more than 1 million people in the labor force than a year earlier.

That’s why even though politicians may focus on month-to-month changes, economists are often more interested in the long-term trends. In that context, Friday’s employment report number was consistent with a labor market that has slowly and painfully been working its way back to life.

“This is encouraging stuff,” said Paul Ashworth, chief U.S. economist with Capital Economics.

Ashworth noted that the unemployment rate has fallen by half a percentage point in the last two months, from 8.3 percent to 7.8 percent. But the unemployment rate was also at 8.3 percent in January, and it is down from 9 percent a year earlier. He said it’s not uncommon for job market data to move out of step with other economic data.

In a research note, economist Dean Baker with the liberal-leaning Center for Economic and Policy Research noted that it’s common to have big monthly swings in the employment data, and said the September report may well be a statistical fluke.

“Still,” he added, “this month’s numbers almost certainly indicate that the unemployment rate is moving downward, even if the speed is considerably slower than the latest data indicate.”

The White House released a statement Friday saying the employment report marked progress in the nation's slow economic recovery.

"While there is more work that remains to be done, today's employment report provides further evidence that the U.S. economy is continuing to heal from the wounds inflicted by the worst downturn since the Great Depression," said Alan Krueger, chairman of the White House Council of Economic Advisers.

But the big drop in the unemployment rate had some conservatives crying foul about the accuracy of the data so close to the presidential election. Rep. Allen West, a Republican from Florida, was among those who accused Democrats of trying to make the unemployment situation look better than it is.

"Somehow by manipulation of data we are all of a sudden below 8 percent unemployment, a month from the Presidential election," West said on his Facebook page.

U.S. Labor Secretary Hilda Solis said all the talk about data manipulation was absurd. "I'm insulted when I hear that, because we have a very professional civil service organization. These are our best trained and most skilled individuals," Solis told CNBC. "It's really ludicrous to hear that kind of statement."

It’s not uncommon for unemployment figures to be revised later to reflect refinements in calculations, but economists said that's usually a result of a better understanding of the labor market, rather than any deliberate attempt to tweak the data.

“No mainstream economists, as far as I’m aware, would question whether the statistics have been deliberately manipulated,” Ashworth said.