Don’t Miss the Forest for the Trees on Unemployment

According to Friday’s BLS report, nonfarm payrolls rose by 120,000 in March (establishment survey) and the unemployment rate (household survey) dipped to 8.2%.

Those are the numbers. The facts. The data. And no matter how dry that might seem, people will find ways to see it differently. An optimist might note hiring continued, while a pessimist might note the increase in payrolls was slower than the prior few months and missed analysts’ estimates. However, while the expectations miss was a stumble, and the number of hires marked a slowdown from a recently brisk pace of roughly 250,000 monthly hires, we’d caution against drawing sweeping conclusions from one month’s (or even one survey’s) data alone. To do so is to risk missing the forest for the trees on the overall unemployment picture. In fact, digging deeper than media headlines, the unemployment report was perhaps most notable for lacking any single area of extreme weakness or strength. (Adding to confusion, the BLS’s household survey, which polls actual households for new jobs, reported fairly robust job growth of nearly 318,000 in March.)

So, what to make of all this? Is the economy creating more jobs? Or fewer? Or maybe it’s stayed the same? It seems to us March’s slower hiring (in the establishment survey) was likely due to month-to-month volatility and seasonal adjustments that can over-inflate prior months around year end. These numbers are almost always revised for greater accuracy down the road. For example, February’s previously reported 227,000 nonfarm hires figure was revised up nearly 6% to 240,000. And it’s likely March’s result will be revised again as well (up or down).

And what of the unemployment rate? We’ve discussed many times the wackiness of unemployment rate calculations, but setting aside our objections momentarily and accepting that the unemployment rate is just one way to gauge the health of the US’s employment situation, we’d remind readers one data point doesn’t a trend make. And calls for a double dip, a new contraction or impetus for more quantitative easing seem rather myopic and out-of-sync with myriad other data. In fact, those extrapolating March’s employment result out to a trend are, well, missing the trend. Consider:

• The official unemployment rate (U-3) dropped from a high of 10.0% in October 2009 to 8.2% today—fully 1.8 percentage points lower. The unemployment rate has ticked down or stayed constant for nearly six straight months now.
• The much-discussed U-6 unemployment rate, which includes marginally attached workers or those employed only part time, also ticked down to 14.5%. Not ideal, but well off of the peak 17.2% U-6 rate.
• Now, these are all government data, and they clearly have their quirks. But the fact is, they’re largely echoed by private-sector data, too.

Moreover, as we’ve also detailed in the past, job growth typically lags economic growth. And as economic growth in the US rolls on, we largely expect the employment situation to follow suit. However, that’s not to say there won’t be some volatility along the way. Granular economic data are always susceptible to volatility, adjustments, recalculations, revisions and so on. So instead of getting caught up with just one data point, look for the trend. And right now, the trend of employment growth is still looking bright.