Wise Up to the Proper Flaws of Monthly NFP Data

The monthly jobs report is a flawed statistical series. Its just not flawed in the way you may think it is.

Monthly Non Farm Payroll Data is about a marginal change in measures of short term job changes — it is a tiny change in employment numbers relative to an enormous base of the people in the USA who are employed. What BLS actually measures is a single and relatively small data point — a very noisy series, subject to frequent revisions — against this much larger pool.

Here is what we wrote about this last year:

“To begin with, you need to understand the size and scope on the Labor market, and what is actually being mode led. There are [more than] 140 million Americans working full time in the country today. Another 15 million or so would like full time jobs, but don’t have one. They may be working part time or not at all.

What the monthly Employment Situation report measures — in near real time — is the net changes in that number. Take the total net number of new hires, subtract the job losses, and you get the marginal change in Employment.

Since our starting number is so big (140m+), and the monthly net changes are so small (200k), the overall change is a statistically small number. Typically, the net change is between one tenth [of a %] (140k) and one quarter [of a %] (350k). During the height of the 2008-09 crisis, the net change was approximately half a percent (700k).”

Now, this isn’t to suggest that the NFP data, however modest the monthly data series may be, is without value. There are lots of juicy morsels of statistical goodness buried within. However, one needs to tease it apart carefully and contextualize the number series relative to other economic information. What it is not is an end all bombshell number it is made out to be by the 24 hour news channels with lots of air time to fill. (And No, we don’t need a countdown ticker to the second as to when the jobs report comes  out).

People seem to get confused about two things: 1) The actual problems with the BLS model; 2) The value of this data series to investors.

The flaws in the series should be apparent: You are dealing with data that is cyclical, very difficult to measure in real time, based on statistically small changes of a very large number. No, the White House does not order BLS wonks to fake the data. Yes, Seasonal Adjustments are pretty standard statistical measures. No, the Birth Death adjustment is not the boogey man its described as. The grand conspiracists talk a good game, but have never proven their cases.

As to the value to investors, these days, NFP’s impact on Fed thinking is probably its most significant element.

I always find it pleasing when a meme gets pushed from the blogosphere into the MSM. The moderate statistical significance 0f NFP is the latest such example.  Here is the WSJ:

“The most-watched economic report of the month also is the most exasperating because it is hard to achieve precision when measuring changes in a very large number. For example, the consensus expectation for Friday’s nonfarm payrolls report is for growth of 163,000 jobs during April. But the two competing government surveys, payroll and household, are about 770,000 jobs apart in their estimates of jobs lost since the downturn began.

Even murkier is the official unemployment rate, which fell to 8.2% last month and is expected to hold steady in April. An alternate measure of unemployment known as U6, which counts discouraged workers, sits at 14.5%. The difference between the two gauges of unemployment is near a record.

All this imprecision should cause investors to take Friday’s report with a giant grain of salt.”

A giant grain of salt indeed.

As wonk statistician George Box stated 3 decades ago, “All models are wrong, but some are useful.” The key to NFP is understanding what aspects of the monthly release are useful. To me, that would be the overall trend, and three internal measures: Hours worked, temporary help, and wages paid.


BLS data released at 8:30am EST


Contextualizing the NFP Data (April 1st, 2011)

(Mis)Understanding the Birth Death Adjustment (July 3rd, 2010)

A Short NFP Q&A (November 4th, 2011)

For Job Gauges, Never the Twain Shall Meet
WSJ May 3, 2012

This post originally appeared at The Big Picture and is posted with permission.

One Response to "Wise Up to the Proper Flaws of Monthly NFP Data"

  1. llisa2u2   May 5, 2012 at 9:32 am

    Maybe sometime someone like yourself could kinda fill in the gaps between the WSJ:"The difference between the two gauges of unemployment is near a record". AND from your present article:"the overall trend, and three internal measures: Hours worked, temporary help, and wages paid." EPI.org has super charts and statistics, but this blog site sure gives some key summations! The present trend(s) indicate?