Publié par : crise2007 | novembre 6, 2007

October Employment: Plus 166K or Minus 250K Jobs?

October Employment: Plus 166K or Minus 250K Jobs?

Nouriel Roubini

The U.S. October employment report came better than expected. But the details of this report are much weaker than the headline figure of 166K non-farm jobs created in October.

First, the establishment survey says that 166K jobs were created in October. But the household survey says that 250K jobs were lost in October. Which survey is more correct? In years when the economy was growing rapidly (2004 to mid 2006) the household survey was showing faster growth than the establishment survey. Indeed at that time supply-side commentators used to write every other month (in the op-ed page of the WSJ and other media outlets) that the household survey was a much better measure of the employment situation as the establishment survey did not fully reflect self-employment and new smaller businesses. But whether one survey or the other is a better proxy of the true state of the labor market depends on when you are in the business cycle. When the economy is growing fast – as in 2004-2006 – the household survey may overestimate job creation; when the economy is slowing down – like now – the establishment survey may overestimate job creation and the household survey may be a better measure. So today the household survey tells us that 250K jobs were lost in October.

Second, the bias of the establishment survey in periods of growth slowdown is exacerbated by the birth/death model used by the BLS that creates statistical jobs that do not exists based on their statistical model of new born firms and dying firms. When the revisions to these early estimates of birth/death were done – by the BED survey and in the annual benchmark – significant downward revisions were shown: only 27K private jobs created in the Q3 2006 quarter (as opposed according to the initial estimate of 500K) in the BED survey; -300K in the annual benchmark up to March 2007. So expect downward revisions to Q2, Q3 and Q4 figures when these updated surveys appear.

Third, the unemployment rate remained stable at 4.7% because in October 211K workers left the labor force, most likely discouraged workers who cannot find jobs. Without this reduction in the labor force the unemployment rate would have been higher.

Fourth, job losses continue in housing, manufacturing, retail; and employment in financial services is nearly flat (+2K). And the official job losses in construction – a mere – are not believable: with the worst housing recession in US history official job losses (that do not included undocumented/illegal workers) are much lower than the actual ones. And the onslaught of job losses in sectors related to housing (mortgage brokers, real estate agents and dealers, mortgage firms employees, financial sector related to housing) has barely started to show up in the service jobs figures. Even the BLS had to recognize today – in its employment report the mis-measurement of undocumented workers:

Are undocumented immigrants counted in the surveys?

Neither the establishment nor household survey is designed to identify the legal status of workers.  Thus, while it is likely that both surveys include at least some undocumented immigrants, it is not possible to determine how many are counted in either survey.  The household survey does include questions about whether respondents were born outside the United States.  Data from these questions show that foreign-born workers accounted for about 15 percent of the labor force in 2006 and about 47 percent of the net increase in the labor force from 2000 to 2006.

So according to the BLS half of all jobs created in the 2000-2006 period were among foreign born workers; while most of these workers are legal many are undocumented or illegal (with a large fraction in construction). Given the recent data on the sharp fall in workers remittances from the US to Mexico and Latin America we now know that massive losses of jobs in construction (where up to 30% of workers are undocumented) can explain the puzzle of the collapse of residential investment having such a small effect on the officially recorded housing employment.

Fifth, look for further downward revisions to monthly employment data: the September figures were already revised downward; and so have the figure for several months in 2007. And 80% of the 166K official job creation in October was in education, health care and hotels/hospitality; while most of the rest was in the government sector. So, the quality of job creation is rapidly deteriorating with persistent job losses in manufacturing, housing, retail, financial services that are likely to continue and deepen.

Sixth, real wage are growing very slowly: nominal wages grew a modest – and lower than expected – 0.2% in October and 3.8% over a year ago. In real terms this adds up to real wage growth that is barely close to 1%.

Seventh, employment is a lagging indicator of the economy: when the economy slows down and demand falls firms don’t know if the fall in demand is temporary or persistent; thus they don’t cut production but built up inventories of unsold goods; if the demand fall persist they cut production but they don’t cut workers given hiring/firing costs; only when the fall in demand is persistent you start to see a cut in employment. Thus, looking at the employment report is like looking at the rear window of the economy; it is a lagging indicator of the business cycle that says little about where the economy is headed.

If you are interested in understanding where the economy is going you should rather look at the ongoing disaster in credit markets – with a severe and spreading credit crunch –  that will get uglier in the next few months as financial institutions are forced to mark to market massive – still unrecorded – losses on trillions of mortgages and related MBS and CDO tranches. With the ABX index for BBB- now down to the 20s and even the AAA tranches now down from par to 79 there are hundreds of billions of losses that no financial institutions has even started to account for. When allegedly AAA tranches of CDO trade at 79 cents on the dollar you know you have a massive and severe financial nightmare ahead. So, instead of the NFP report look daily at what the ABX indices are telling you about what is happening the economy and the financial sector.

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  1. please give me information about how indian govt services is better than the private service.

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