From Daniel Quinn Mills, a professor of business administration at Harvard University, in a Wall Street Journal article, “Seasonally Adjusted Jobs Numbers Offer Cold Comfort,” 3/6/15:
The U.S. economy lost more than 2.7 million jobs between the middle of December and the middle of January, but the big news from the January jobs report was that the economy added 275,000 jobs during the same period.
Why the discrepancy? The Bureau of Labor Statistics touts “seasonally-adjusted” figures, which attempt to measure how recurring seasonal events affect employment. The raw figures are available to researchers, but the adjusted figures are the priority in public announcements.
Yet reporting a statistically adjusted figure as if it were original data is a mistake, and a significant distortion of reality that only adds to public distrust of the government and the media. People know that jobs were scarcer in January than in February, even if the government told them the opposite.
Seasonally adjusted figures also contribute to less effective policy-making.The Labor Department reported on Feb 26 that applications for unemployment benefits unexpectedly rose to a six-week high. This would not have been a surprise if observers had paid attention to the drop in unemployment between December and January.
Mr. Mills then makes a persuasive case that the present seasonal adjustment process overstates employment, because they date from a time when there was significant diminution in manufacturing during the winter months. Manufacturing is now much less a part of the economy, and services do not have the same winter diminution.
What is most important here is that the a Harvard professor took notice of a rather obvious flaw in the Bureau of Labor Statistics (BLS) model, and he did so in The Wall Street Journal. The seasonal adjustment flaw has been well-known for years to the tiny subset of bloggers who make economics and finance their domain (see SLL and its blog roll, and Zero Hedge—undoubtedly the leader—and its blog roll). They also know the shortcomings of the birth-death adjustment, whereby the BLS assumes that new businesses create a certain number of jobs each month. That statistic is especially problematic now, when more small businesses are closing than opening. The bloggers are the ones who highlight each month the drop in the labor force participation rate, due to unemployment people who simply give up and often go on government-provided relief. Such people are obviously unemployed, but since they are no longer looking for work, they are not considered unemployed, flattering the unemployment rate. Often, the bloggers’ accusations of error are borne out months after the original BLS release, when statistics and benchmarks are revised.
It is perhaps not surprising that most of the MSM accepts the unemployment numbers (and other statistics) at face value. It’s hard work and requires some expertise to dope out government statistics. What is surprising is how many people, including fund managers and others who are responsible for investing large sums of money, also ignore the underlying issues, and base crucial investment decisions on flawed statistics. Thus SLL’s excitement over a Harvard prof publishing a critique in the WSJ. It’s tempting to say if someone is taking on government statistics and the media hordes who dutifully report them without question, some progress is being made, but SLL is certainly not expecting miracles. After all, there has been story after story wondering why, with all that “job growth”, consumers don’t seem to be opening their wallets and purses. The best answer comes from Mr. Mills: there has been no spending because there has been no job growth.
A final point: the Fed is being hoisted on this petard. It almost has to raise its federal funds target this summer because of the “strong” jobs numbers. It cannot very well disparage the government’s own figures, even though it is becoming an open secret that those numbers are wrongly calculated and lead to erreneous conclusions about the economy. The rest of us get to enjoy the irony.
