Good Friday Morning! “Welcome to this week’s edition of the Beltway Outsiders! We’ve got all the latest and greatest news and stories to keep you informed and entertained. Before we dive in, let’s take a moment to appreciate the current state of the world. It’s like a never-ending game of whack-a-mole, every time you think you’ve got it figured out, something else pops up. But don’t worry, we’ve got the cream of the crop for you this week. So sit back, relax, and get ready for some news that will make you laugh, cry, and shake your head in disbelief. Let’s get started!”
I asked ChatGPT to write this week’s introduction, and that’s what it wrote. A decent first shot. But I’m not overly concerned about robots taking my job just yet. Although, it is a better poet than me. Here’s something it wrote up while I was working on this week’s topic with it:
There once was a nerd who loved to read
BLS reports, oh what a wonderful breed!
With every release, his heart would leap
As he delved into data, deep and steep.
He’d pore over numbers and charts all day
Analyzing employment in every way.
The monthly jobs report was his delight,
He found it quite easy to spend the night.
He laughed at the margins of error with glee,
And proclaimed “This data is as good as can be!”
And when his friends asked, “Why read these stats?”
He’d reply, “It’s simply a matter of facts.”
So if you’re a nerd who loves to peruse,
Reports from the BLS, with glee and muse,
Remember, the data is always right,
And with every report, you’ll see the light!
I mean… I don’t agree with it on seeing the light in BLS reports. It’s accurate on the nerd part, though. It should tip you off to this week’s topic: job statistics. I thought about covering the State of the Union (SOTU), but no one watched it. It was the least-watched SOTU of the last 30 years.
So, this week, I will cover why I think the job report numbers are wrong. Or, give you two interpretations of why 517,000 jobs created isn’t what it seems at first glance. Links to follow
Where you can find me this week
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[02/06/2023] Joe Biden allows Communist China to violate US airspace – Conservative Institute
[02/10/2023] Buck stops with Biden on Chinese Spy Balloon – Conservative Institute
The Report that Challenges a Strong Labor Market narrative.
I’ve seen many job reports that made no sense or seemed out of line. But it’s hard to think of one that was as bizarrely out of line as the January 2023 monthly report. Both the consensus expectations (and my own) anticipated a report showing between 175,000 to 225,000 jobs created in January. I was expecting something below 200,000.
The actual number: the BLS says that 517,000 jobs were created in January 2023, bringing the unemployment rate to its lowest level since 1969. In a time when layoffs are almost a top story on the pages of business news sites every day, the BLS says more than half a million jobs were created.
What’s striking about the January report is that the number of jobs created was high, yet wages didn’t grow much. Wages are cooling in a job market where openings remain high, showing strong worker demand. That doesn’t line up with what you’d expect, either.
You can view these reports two ways: 1) the jobs reports show a shift in the economy, and the Fed gets its soft landing. Or 2) we will get revisions that indicate these reports are a mirage. I’ve got evidence for both.
First, on the shift. I’ve alluded to this in previous newsletters. We may get a soft landing as weaker segments of the economy offset the job layoffs. The Wall Street Journal has been pondering this question too:
The U.S. added 1.1 million jobs over the past three months and ramped up hiring in January. That appears puzzling, given last year’s economic cool down, signs that consumers are pulling back on spending as their savings dwindle, and a stream of corporate layoff announcements, particularly in technology.
Driving the jobs boom are large but often overlooked sectors of the economy. Restaurants, hospitals, nursing homes and child-care centers are finally staffing up as they enter the last stage of the pandemic recovery. Those new jobs are more than offsetting cuts announced by huge employers such as Amazon.com Inc. and Microsoft Corp.
Employers in healthcare, education, leisure and hospitality and other services such as dry cleaning and automotive repair account for about 36% of all private-sector payrolls. Together, those service industries added 1.19 million jobs over the past six months, accounting for 63% of all private-sector job gains during that time, up from 47% in the preceding year and a half.
Some of the segments of the economy hardest hit during the pandemic are finally recovering. As these sectors return, they can absorb the losses from tech and other sectors.
If this scenario plays out, the issue is whether job growth stays strong enough to force the Fed to keep higher rates. Strong job growth with even more job openings should equate to more substantial wages – it’s simple supply and demand. I’ve mentioned the wage/price spiral several times. It’s the Fed’s main fear, and strong job growth brings that into play.
“We didn’t expect it to be this strong,” Powell said during a question-and-answer event at the Economic Club of Washington, D.C. “It kind of shows you why we think this is a process that will take a significant period of time.”
While Powell declined to say whether interest rates will need to go higher than policymakers estimated late last year, he said the data emphasizes that the “process is going to take quite a bit of time. It’s not going to be smooth. It’s going to be bumpy.”
There’s nothing new there. The jobs report is robust, which could require more Fed intervention. But it’s also a hint that a soft landing may be in view.
The question is this: is the labor market that strong?
I started questioning that this past week. One of my favorite financial shows/podcasts is The Lead-Lag Report by Michael Gayed. If you’re on Twitter, give him a follow here (he’s also on Instagram). I have yet to learn how Gayed does the sheer volume of interviews in the financial space, but he cranks out a ton. He’s like a financial Joe Rogan (without the craziness) where he’ll talk to a wide variety of people about all kinds of topics. His focus is finance, but you’ll get some other issues from time to time.
He had a guest this past week, recorded before the Friday jobs report, named Joe Gamble, examining whether or not the labor market is as strong as reports suggest. The show was: “Lead-Lag Live: The Strong Jobs Market Lie With Jack Gamble.”
The gist of the interview is this: the monthly reports are missing a significant weakness in the labor market.
First, the Philadelphia Fed released a report saying that the Bureau of Labor Statistics overstated job growth in Q2 of 2022. The BLS declared that in Q2, the economy generated 1.12 million jobs. The Philadelphia Fed said only 10,500 jobs were created. That’s a difference of a million jobs in a single quarter.
There was a small news cycle about it, but people moved on. The problem is that the BLS monthly reports from Q2 2022 and the Philly Fed were wrong. It was worse.
Jack Gamble pointed to the Business Employment Dynamics report from the BLS in Q2 of 2022. This report was released on January 25, 2023. I’m going to quote from the introductory paragraph:
From March 2022 to June 2022, gross job gains from opening and expanding private-sector establishments were 8.3 million, a decrease of 185,000 jobs from the previous quarter, the U.S. Bureau of Labor Statistics reported today. Over this period, gross job losses from closing and contracting private-sector establishments were 8.5 million, an increase of 1.6 million jobs from the previous quarter. The difference between the number of gross job gains and the number of gross job losses yielded a net employment loss of 287,000 jobs in the private sector during the second quarter of 2022.
That’s right. The BLS is saying that instead of 1.12 million jobs created, as previously stated, they now state the economy lost 287,000 jobs in Q2 2022. The job market contracted.
If you recall, Q2 2022 was also when we experienced our second consecutive quarter of negative GDP growth. That’s not a strong labor market; it signifies a recession. In 2022, “experts” told everyone you couldn’t have a recession with job gains where they were. But we didn’t have job gains.
Now, you may ask, what are the differences between these reports? I’ll get into that here.
First, what you see all the time: the monthly reports. These are surveys with two elements: 1) the household survey and 2) the establishment survey. In a nutshell, the BLS polls households in one survey and businesses in another to get an idea of the job situation. And these monthly reports get revisions because sometimes people don’t report their survey results on time.
How extensive is the survey? The Household portion is a “sample survey of about 60,000 eligible households conducted by the US Census Bureau for the US Bureau of Labor Statistics (BLS).” On the establishment side, “BLS collects these data each month from the payroll records of a sample of nonagricultural business establishments. Each month the CES program surveys about 122,000 businesses and government agencies, representing approximately 666,000 individual worksites, in order to provide detailed industry data on employment, hours, and earnings of workers on nonfarm payrolls. The active sample includes approximately one-third of all nonfarm payroll jobs.”
Those are direct descriptions from the BLS. That monthly report is a snapshot of a portion of the workplace. It’s subject to all the same issues we get with traditional polling. The Business Employment Dynamics (BED) report is different and far more extensive.
The BED is a comprehensive picture of all job gains and losses within the US economy. It measures businesses creating or destroying jobs and companies forming or going out of business. It uses quarterly reports companies have to file to get a broad picture of everything. Here’s the detailed description:
The Business Employment Dynamics (BED) data are a product of a federal-state cooperative program known as the Quarterly Census of Employment and Wages (QCEW). The BED data are compiled by the U.S. Bureau of Labor Statistics (BLS) from existing QCEW records. Most employers in the U.S. are required to file quarterly reports on the employment and wages of workers covered by unemployment insurance (UI) laws and to pay quarterly UI taxes. The QCEW is based largely on quarterly UI reports which are sent by businesses to the State Workforce Agencies (SWAs). These UI reports are supplemented by two additional BLS data collections to render administrative data into economic statistics. Together these data comprise the QCEW and form the basis of the Bureau’s establishment universe sampling frame.
This last report included information from 8.9 million companies and the data they reported. It covers almost the entire labor market across the board.
Returning to my main point: the broadest measure we have of the jobs market says that when we had our second quarter of negative GDP growth, we also had sizeable job losses. The monthly reports said everything was fine, but those were wrong.
Here’s the other reason the BED is essential: it’s used in business cycle analysis. That’s according to the report itself. Do you know who does the primary business cycle analysis in the US? The NBER. That group is the official arbiter of when a recession begins in the United States.
Here’s what the NBER has now: negative GDP and job growth for Q2 2022. That’s a red flag in recession timeline analysis. The next BED report will come out in April 2023, covering Q3 of 2022. NBER will watch it closely to determine if they need to start drawing the lines of a recession.
The counter to this is easy: Q2 2022 is a one-off. We could easily see the BED show positive job growth in Q3 of 2022, which makes Q2 2022 an anomaly. That’s certainly possible, and the monthly reports (plus positive GDP reports for Q3/Q4 of 2022) suggest that is possible.
But the reverse is also possible. If these BLS monthly reports are overstating job growth, that dramatically shifts how everyone views what the Federal Reserve is doing. If job growth is weak, the Fed’s rate hikes are on far weaker ground than everyone is saying.
It will be a while before we find all this out (and I’d suggest dumbing some federal resources into the BLS for fast-tracking BED data). The Q2 2022 BED is one of the first government reports that challenges the prevailing narrative of a strong labor market. Because it encompasses a full quarter and is based on hard data, we must take it seriously.
Links of the week
Children Lost One-Third of a Year of Learning During the Pandemic, Analysis Finds: “The COVID-19 learning deficit is likely to affect children’s life chances through their education and labour market prospects,” the analysis’ authors argue. – Emma Camp, Reason
‘Knew Covid had been engineered to make it infectious to humans but were told to shut-up’: Covid was the name of the disease caused by a new coronavirus, which led to a new respiratory disease in Wuhan, China, which rapidly spread throughout the world, firstly Italy and then to the rest of Europe, America, South America and the Far East. – The Express
GOP Right To Deny Ilhan Omar a Committee Seat – David Harsanyi, RealClearPolitics
College Board Has Handed Ron DeSantis a Victory – Ilya Shapiro, NYPost
There’s a Lot More to the Chinese Spy-Balloon Story – Jim Geraghty, National Review
The IRS Fails at the Basics – Dominic Pino, National Review
Glenn Youngkin in rare territory, 56% approval, Virginia ascending – Washington Examiner
TV Ratings: State of the Union Audience Drops – The Hollywood Reporter
4.9 million Fabuloso cleaning products recalled due to bacteria risk – Good Morning America
Twitter Thread(s) of the week
Satire of the week
Thanks for reading!