Latest News About the U.S. Economy

A lot of important news about the U.S. economy has been released during the latest 24 hours. Including last night's flow of funds report, the trade balance report and the employment report.

Starting with the flow of funds report. It was actually somewhat more bullish than I had anticipated. While household debt again rose to a new all time high, to 131,8% of disposable income up from 130,4% the previous quarter, it was still a lot slower increase than expected given the much sharper increase in bank lending. Presumably, this apparent statistical discrepancy is a result of a significant slowdown in non-bank lending.

Another bearish number was a continuing decline in owner's equity in homes, which fell to a new all-time low of 53,1%. Yet another bearish indicator was the corporate financing gap (the amount of money corporations need to raise from outside sources) which rose to an annual rate of $70,5 billion, up from $48,3 billion in the third quarter. For all of 2006, the gap was $47,1 billion, compared to a surplus of $138,3 billion in 2005.

One bullish number was the significant increase in household net worth, which occurred despite higher levels of debt and the slower house price increases. Indeed, asset values and therefore net worth increased faster than debt for the first time for quite some time, lowering the debt to net worth ratio. This was the result of the stock market rally last year, which is illustrated by the fact that mutual fund shares and pension fund reserves were the assets that increased the most. This bullish trend is however unlikely to continue in the first quarter of 2007 as stock prices have been stagnant.

Turning now to the trade deficit number, it came in roughly as expected at $59,1 billion. Contrary to Gregg Robb of marketwatch, however, it won't add to first quarter GDP, as the deficit was somewhat higher than in October 2006, both in absolute number and in the "2000 Chain-Weighted Dollars" used for calculating real GDP growth.

The employment report was seemingly bullish at first glance. For some reason, "professional analysts" are obsessed with the non-farm payroll number, even though it is actually one of the less relevant. And as the non-farm payroll number came in line with expectations and as the unemployment rate fell and average hourly earnings increased a full 0,4%, the number was interpreted as a vindication of the bulls.

However, the small increase in non-farm payrolls masks a unusually large decline in the more interesting number of hours worked, which fell 0,3%. And the decline in the unemployment rate was a result of a significant decline in the labor force participation rate. Employment actually fell according to the household survey and is lower than two months ago.

The increase in average hourly earnings will likely be cancelled out by an even bigger increase in consumer prices as energy prices have recovered from the January lows and both food prices and "core" prices rise rapidly.

So, contrary to the Wall Street interpretation, the employment report was bearish as hours worked and probably also real wages fell, supporting the stagflation scenario I've predicted for some time. Also supporting this is the fact that commodity prices have started to rise again after a brief correction, while rising level of defaults of sub-prime mortgages is likely to put further pressure on the housing market.

Relatively Strong Employment Report

Today's employment report could be characterized as relatively strong-without sarcasm. Indeed, by the indicators that I look at, it was even stronger than the headline number of a mere 11,000 lost jobs.

That is first of all because for the first time since July, the household survey showed a stronger employment number than the payroll number. The payroll number is more reliable when it comes to short term fluctuations, but if the household survey number deviates consistently then this suggests that the payroll survey number could under- or overestimate the strength of the job market. Still, this was just one month, and seen over several months the household survey number still indicates greater weakness.

And secondly, the average work week rose as much as 0.2 hours, or 0.6%, increasing hours worked by the same amount. Average hourly earnings were on the other hand week, rising just 1 cent, or 0.05%. That was still enough to increase average weekly earnings by 0.65%, something which means that real weekly earnings likely rose after several months of declines.

Are there any negative aspects in the report? No, not really, except for maybe the aforementioned weak average hourly earnings number. And given the increase in hours, not even that was really significant.

However, part of the strength could be the result of seasonal adjustment distortions. November last year saw a big drop, something which could be reinterpreted by the seasonal adjustment formulas to mean that employment should be weak in November, as opposed to reflecting cyclical weakness and a big real wage schock. Given how consistently weak other economic numbers, including other labor market related numbers, have been recently it seems reasonable to assume that this

This conclusion is confirmed if we compare November seasonal adjustment this year compared to previous years. If seasonal adjustment adds more or subtracts fewer than in the past than it is likely last year's weakness have been interpreted as seasonal rather than cyclical. And if we look at the employment report for November 2007, seasonal adjustment reduced job growth by 156,000, whereas now it reduced it by only 91,000. If seasonal adjustment had been the same as in 2007, job losses would have numbered 76,000 instead of 11,000.

Even so, this report strengthened the bullish case as job losses were still smaller than earlier in the year.

U.S. Employment Report Confirms Recession

As expected (by me) the employment report showed continued decline in private sector employment who according to these preliminary estimates by an additional 101,000, primarily in manufacturing and construction. In addition, there were significant downward revisions of previous months. The media noted that December employment growth was downwardly revised by 41,000 and January employment growth by an additional 5,000, meaning that the level was 46,000 lower. However, what the media failed to note was that the downward revision of private sector employment was even greater as government employment growth was upwardly revised by 27,000 in December and by 20,000 in January. Add all this up and you get a total downward revision of private sector employment of 93,000, implying in turn that reported private sector employment was 194,000 lower for February than the previously reported level for January.

Private sector employment is down for three months in a row now, clearly indicating a recession. And I in fact suspect that there will be more downward revisions. Although the number of jobs imputed by the flawed so-called "birth-death model" is now lower than in past reports (this is likely one of the reasons for the downward revisions), it still claims that a net 640,000 more jobs was created in new businesses than businesses who failed during the latest year, or roughly 53,000 per month. At this stage of the business cycle, any number over zero likely overestimates this, meaning that the decline in employment is likely even steeper than they now suggest.

This is also confirmed if you look at the household survey. While the payroll survey claims that total employment growth during the latest 12 months 860,000 of which 612,000 was in the private sector, the household survey says that total employment growth during the latest 12 months was just 105,000. If you subtract government employment growth from that you get a decline of 143,000. There can be little doubt thus that private sector employment has fallen since at least December, probably also November, and that it in December-February has fallen a lot more than current numbers suggest.

That, and other indicators, in turn suggests that the U.S. economy clearly fell into a recession during Q4 2007 and that this recession have become more severe during this quarter.

Mediocre U.S. Employment Report

Today's U.S. employment report was overall somewhat weak-at least compared to many of the other stronger reports recently released.

The household survey was this month somewhat stronger than the payroll report, following two months of very weak household surveys. It wasn't as strong as the drop in the unemployment rate suggested though. Most of that drop was the result of a decline in the labor force participation rate, which dropped to a record low 64.3% from 64.5% the previous month. The employment rate rose to 58.3% from the cyclical low of 58.2% the previous month. That is still very bad.

The payroll survey showed a gain of 103,000, barely sufficient to keep up with population growth. The private sector and the federal government continued to add jobs, something which was partially counteracted with continued job cuts from state and local governments.

Meanwhile, the average work week was unchanged, and average hourly earnings rose a mere 0.1% (likely zero or negative after adjusting for inflation) suggesting together with the moderate employment increase a modest gain in aggregate nominal labor earnings and even smaller or flat change in aggregate real labor earnings.

All in all, most economic reports recently released indicate a slight acceleration in the U.S. recovery. This employment report would by contrast indicate that the recovery continues at the previous ver modest pace.

U.S. Employment Report Confirms Weak Recovery

Today's U.S. employment report confirms that the U.S. economy is recovering-but only at a slow pace and with different trends in different sectors.

The household survey showed a drop in the unemployment rate from 9.2% to 9%-but that mostly reflected a drop in the labor force participation rate which fell to a new multi decade low (as well as a downward revision of population). Actual employment rose ony 117,000, only barely enough to keep up with the population growth rate.


The payroll survey showed an increase in employment of only 39,000 with the private sector adding 50,000 jobs. Job growth is especially strong in manufacturing while construction continued to losejobs, confirming the sectoral trends discussed earlier this week.

Meanwhile, average hourly earnings rose unusually much, 0.35%, but as the average work week fell by 0.3%, average weekly earnings barely rose at all in nominal terms.

By contrast, the northern neighbor of the United States published a quite strong employment report, with employment increasing the equivalent of nearly 600,000 in the U.S. The increase was disproportionately in part-time jobs, but even full-time employment increased significantly.

U.S. Employment Report Weaker Than It Seems

Stocks and the dollar rallied, while bonds sold off, after the slightly stronger than expected U.S. employment numbers. Still, while the numbers were more bullish than I had expected in some aspects, the details do not look as relatively benign as the headline.

The headline talks of a decline of 20,000 payroll jobs, less than most analysts including me had expected. And unlike in previous months, government employment boosted the number only slightly, by 9,000 to be more precise. Meaning that private sector employment fell by only 29,000, much lower than in previous months. However, as in previous months many of those jobs were imputed jobs by the flawed so-called "birth/death" model. Indeed, they again raised the number of assumed jobs to 66,000 per month, up from 64,000 in March and 53,000 in February. Thus, even as reported employment continues to decline, the government implausibly assumes that new business start-ups are accelerating.

During the latest 12 months, private sector employment according to the government is up by 238,000. However that includes the 787,000 "birth/death" model-jobs, so actually reported private sector employment is in fact down by 549,000. That decline is of course something which occurred entirely during the latest 6 months, when total private sector employment is down 282,000 to which one can add the 394,000 imputed jobs, meaning that actually reported private sector employment is down 676,000, or on average 113,000 per month.

This was probably what was at work in the sectors that supposedly created so many jobs, and so supposedly to a large extent compensated for continued massive job losses in manufacturing and construction. Supposedly, professional services -meaning more specifically accountants, computer programmers and administrative services- and health care saw massive employment gains of a magnitude that looks suspicious. They did in fact also have massive number of jobs imputed by the "birth-death" model, although it is unclear to what extent that reflects seasonal factors and to what extent it reflects seasonally adjusted numbers, as the Bureau of Labor Statistics strangely only report non-seasonally adjusted numbers for jobs imputed by the "birth-death" model.

The one bullish indicator in the report was the decline in the unemployment rate and the rise in employment in the household survey. However, the household survey number tends to be extremely erratic and volatile on a month to month basis so that number can be ignored unless it is repeated during the coming months, which is highly unlikely. Meanwhile, the decline in hour's worked and hourly earnings in particularly manufacturing implies a decline in industrial production and real income excluding the temporary so-called tax rebates.

The Employment Report-Jobless Claims Discrepancy

January's U.S. employment report was in many ways very similar to the November employment report. A small decline in jobs according to the payroll survey, but with other indicators suggesting growth, including a significant increase in average weekly earnings and a big jump in employment according to the household survey.

This supports the view that the U.S. economy is growing moderately right now.

What is worth noticing is however that this report is inconsistent with the reports of growing number of people receiving unemployment benefits (including extended benefits). Compared to a year earlier, the total number of people receiving benefits have risen from about 7.6 million to 11.5 million, while the total number of unemployed is up less dramatically, from 11.9 million to 14.8 million. The number of unemployed without unemployment benefits has thus dropped from 4.3 million to 3.3 million. As a share of the unemployed, people with unemployment benefits rose from 64% to 78%. And while the number of unemployed fell the latest month, the number of people receiving unemployment benefits rose.

What is going on here? Because jobless benefit numbers are based on actual payments while the unemployment numbers are based on the less reliable method of interviews in the household survey, one part of the explanation is probably that the survey number underestimates unemployment for the latest month. The far weaker number from the payroll survey suggests that this is part of the explanation, at least with regard to the latest month's change.

Another explanation is that Congress have made the unemployment benefit system more generous meaning that people who by now would have lost their benefits in the past still have them now.

A third explanation is the one that Obama economic advisor Larry Summers suggested before he became advisor for Obama: the more generous conditions means that people with benefits are less motivated to get a job, causing the number of people with benefits to increase. Once they lose their benefits however, they are willing to take even jobs that they would prefer not to have because they think pay is too low or because they don't like the tasks that certain jobs consists of, causing the number of unemployed without benefits to drop.

Weak U.S. Employment Report

The November U.S. employment report was considerably weaker than that for October.

While the drop in employment according to the household survey was smaller than in October, with a job loss of 173,000 compared to 330,000, the fact that employment according to that survey continues to drop is ominous.

The employment to population ratio therefore fell to 58.2% in November, matching the previous low reached in December last year. Unlike the previous month, the drop wasn't concealed by a drop in the participation rate, and the unemployment rate rose from 9.6% to 9.8%.

The only strong part of the household survey was that part-time unemployment (aka underemployment) fell from 5.9% to 5.7%, and as a result the broader unemployment rate that includes the part-time unemployed and discouraged job seekers was unchanged at 17%.

The payroll survey was considerably weaker in all aspects compared to the report for October. Payroll employment rose only 39,000 compared to 172,000 in October. Unlike in October, the average work week didn't increase and average hourly earnings rose only 1 cent (0.04%) in November compared to 6 cents (0.27%) the previous month.

In the previous report, the household and payroll surveys contradicted each other with the former showing weakness and the latter showing strenth. Now both show weakness, though the household survey is again weaker.

Surprising Job Report

Today's U.S. employment report was much stronger than I expected. Unemployment fell from 4.6% to 4.4% as the number of employed in the household survey rose 0.3%. The headline payroll survey number was a lot weaker, but combined with upward revisions of previous numbers and the increase in the average work week, it still meant a strong increase in hours worked. In addition to all of this, average hourly earnings rose 0.4%.

A very strong number indeed. The one you would have expected from a booming economy, not one steadily weakening as implied by the 1.6% growth number and the 51.2 ISM index for October and a otherwise consistent series of report showing rapidly decelerating growth.

How to explain this anomaly? One possible explanation is that either the production numbers underestimate production growth or that the employment report overestimates true employment growth or perhaps a combination of the two.

The other possible explanation is that both of these numbers are basically correct and that productivity is declining and profits falling even steeper in the fourth quarter than yesterday's productivity and labor cost report indicated for the third quarter. While that would presumably be cheered on by those who think that labor have received too little of economic growth compared to capital, it could be ominous for the outlook of business investments. It could also mean that price inflation could pick up further.

U.S. Economic Numbers Much Weaker Than They Seem

The last few days we have seen reports about the U.S. economy which at first glance have appeared strong-or at least not weak enough to indicate recession. Yet if you look more closely they really are much weaker than they appear-

1. The GDP report which published GDP growth of 3.9% in the American way of expressing growth. Even setting aside the good reasons for believing the GDP price deflators underestimate inflation -and so overestimate real growth- it is still far less impressing than it would seem. First of all, GDP numbers are generally revised down. 2004 GDP growth was for example first published as 4.4%. Now after having been revised down three times in the annual revisions of 2005, 2006 and 2007-it is estimated to be 3.6%. Secondly, the domestic price deflator rose 1.6% versus the 0.8% increase for the GDP deflator (If you're not sure why estimating real income gains on the basis of the prices you pay rather than the prices you receive see here). The likely revision and terms of trade factors together thus indicate a real number 1.6% lower than the headline figure, leaving us with 2.3% in growth.

Moreover, some of the growth was related to increased government demand for goods and services (note this does not include transfer payments like social security or welfare) which rose from 19.4% of GDP to 19.5%-the highest since early 1993.Adjusting for that, private sector growth were more like 1.8%. That is not a recession, but is far from the boom numbers the headline numbers suggest.

Of course, it was not to be expected that the third quarter would be the first of the recession. But it seems increasingly likely that the fourth quarter will have negative growth, as the two reports analyzed below-and many other indicators- suggest.

2.The ISM Manufacturing report fell back to 50.9 in October from 52 in September. That indicates weak growth, but not a contraction. However, this headline number is calculated by weighing together different sub-components, such as new orders, production, employment and prices paid. Guess which sub-component had the highest value and which increased significantly in October? Well, if regular readers remember how many times I've been mentioning stagflation, they should be able to guess that it is the prices paid index. And if they guessed that, they guessed right, as the prices paid index rose from 59 to 63. Excluding that, the overall index would be below the 50 level which is the level which is the border line between expansion and contraction.

3. The employment report were widely interpreted as indicating a strong job market. The main basis for this claim is that the number that financial journalists always focus on, the increase in payrolls in the payroll survey was a full 166,000.

However, first of all, with the mere 0.2% increase in nominal wages, it seems almost certain that real wages fell significantly given the surge in food and energy prices.

Moreover, there are good reasons to believe that this job growth number is extremely misleading and that job growth was in fact negative. The household survey for example indicated a 250,000 job loss.

The payroll survey is widely considered more reliable than the household survey. This is however only to some extent true with regards to monthly changes which have been somewhat erratic in the household survey. However, there are good reasons to believe that the household survey better reflects trend movements in employment. During the housing bubble, employment growth according to the payroll survey was suspiciously
low, with employment increasing by a mere 4.2 million or 3.2% in the four years between December 2001 and December 2005. And the initially reported number was actually even lower than that as the payroll survey growth for that period has been upwardly revised several times.

The household survey's increase of 6.8 million or 5% looks a lot more reasonable.

Now the tables are turned, with the 12 month increase in the household survey being 0.5% versus 1.3% in the payroll survey.

The reason why the household survey is more reliable in tracking trend changes in employment, while the payroll survey tend to underestimate growth during booms and overestimate in during downturns is that the household survey automatically tracks changes in for example in employment of illegal immigrants and start-ups of new businesses or business deaths. The payroll survey is useless in covering either. In order to account for employment in new businesses, the Bureau of Labor Statistics has a "birth-death" model of new businesses. The trouble with that is that it is being applied without any consideration of cyclical fluctuations. The result is that most of the payroll survey growth is now a result of the assumption of new businesses being created, whereas during the housing bubble only a small part of payroll survey growth was a result of this. The absurdity of this is most apparent in the construction sector, where the Bureau of Labor Statistics would have us believe that 164,000 more jobs were created in new businesses than lost through bankruptcies in the last seven months, despite the housing bust.

The payroll survey is thus simply not credible as an indicator of cyclical fluctuations. And if we look at the household survey the bottom line is that employment was 133,000 or 0.1% lower in October than in June. This implies a direct contraction in the labor market.

Employment Report Slightly Less Weak-But Still Weak

The U.S. employment report indicated that the U.S. labor market was slightly less weak in October than in September-but still weak.

The main improvement was that unlike the previous month, average hourly earnings rose and the average work week did not drop, As a result average weekly earnings rose in nominal terms after having declined the previous month. However, it remains to be seen how much, if any, of that nominal increase in average weekly earnings will translate into a real increase as I suspected that consumer prices rose faster in October.

On the other hand, the number of people that had a job continued to fall and the unemployment rate rose to 10.2%-the highest since 1983. It should be noted that the widely quoted payroll employment could underestimate the number of lost jobs. Payroll survey employment fell by 5.5 million in the latest 12 months while household survey employment fell 6.6 million. Basically the entire discrepancy has come in the latest 3 months, when the payroll survey indicated just 600,000 lost jobs while the household survey indicated 1.8 million lost jobs. In the latest month, the drop in payroll survey employment was 190,000 while the drop in household survey employment was 589,000.

Since these two surveys are supposed to measure the same real world phenomenon they should give the same results. When they don't you can be sure that at least one of them is wrong, but usually the truth lies somewhere in between. Most economists, including me, believe that the payroll survey is more reliable particularly when it comes to monthly fluctuations. However, while the truth is probably closer to the payroll survey number, the consistently much larger loss in household survey employment indicates that the payroll survey probably underestimate job losses.

Statistical Notes Friday July 8

-Both industrial production and construction output recovered somewhat in Britain in May from its depressed (largely due to royal wedding) level in April, but both were down compared to May 2010.

-The ISM non-manufacturing survey fell back from 54.6 to 53.3, contradicting the manufacturing survey, while confirming the picture given by the employment report discussed separately in the previous post.

-Contradicting some other recent reports, the latest numbers from Germany indicates a continued strong recovery, with factory orders, industrial production and exports all booming in May.

-Similarly to neighboring Estonia, Latvia's industrial production fell in May this year compared to April (-1.3%) , but rose compared to May 2010 (+10.2%).

-Canada's employment report was stronger than that of the United States, but weaker than Australia's and Israel's (see below), with employment increasing 0.16% on the month and 1.4% over the latest year.

-After a drop the previous month, employment rose 0.2% in Australia. As part-time employment fell while full time employment rose 0.7% this masked an even greater rebound in hours worked. During the latest year, employment is up 2%.

Meanwhile, Australia's trade surplus rose from A$1.7 billion to A$2.3 billion.

-Retail sales in Hong Kong continued to boom in May, up by 27.8% in nominal terms and 21.6% in real terms.

-Employment in Israel was up by 2.5% in the latest year, while real wages rose 1.3% during the same period.

About Employment Report

Today's employment report was in many aspects a virtual copy of previous reports, with moderate declines in payroll employment, erratic swings in household survey employment and unemployment -this month employment fell sharply and unemployment rose sharply, the previous month the opposite happened-, many jobs created in the government sector and an increasing number of imputed jobs from the fraudulent "birth-death" model, so there is really little to say about these things that weren't said in my commentary of previous months reports.

What can be said however that is new is that the report was weaker than some of the moderately bullish numbers in the previous week, and that this really takes any Fed rate hikes off the table, which is bearish for the dollar, especially considering the increased likelihood of rate hikes from the ECB and some other central banks.

U.S. Employment Numbers Weakens Again

After a relatively strong November U.S. employment report, the December report came in much weaker.

While the unemployment rate was unchanged, that was only because the participation rate again dropped. The employment rate fell from 58.5% to 58.2%-the lowest since July 1983, and down from the peak level of 64.7% in April 2000. The household survey in fact said that employment fell by as much as 589,000.

The more reliable (at least when it comes to monthly fluctuations) payroll survey indicated that "merely" 85,000 jobs were lost. But that's bad enough, especially considering that the population is growing, and the fact that the household survey has tended to be a lot weaker during the latest year (Aggregate household survey job loss was 5.4 million, while the aggregate payroll survey job loss was 4.2 million) indicates that the payroll survey likely underestimates job losses. The reason why the payroll survey likely underestimates job losses is probably related to the flawed "birth-death" model which is not actually part of the real survey but is imputed into it by Bureau of Labor Statistics statisticians.

Moreover, unlike in the previous month, the average work week did not increase while the increase in average hourly earnings held steady at a low level (however, the November increase was upwardly revised). Together with the increased loss in jobs, this means that nominal income growth likely slowed dramatically, and is likely non-existent after adjusting for inflation.

And like in the previous month, there is questions about the seasonal adjustments given last years big declines in employment, which could have been misinterpreted as seasonal rather than cyclical (or structural) by the seasonal adjustment models.

Was there anything bullish in the report then? No, not really, except for the aforementioned small upward revision of the November average hourly earnings number. And the report is also strong in a relative sense compared to late 2008 and early 2009 where we saw big drops in all relevant numbers except for average hourly earnings. The economy and the labor market is clearly not contracting in the way we saw then. However, these numbers also clearly indicates that we are not seeing a robust recovery. While the economy is probably growing, it is growing only very slowly and the labor market isn't growing at all.

Mixed U.S. Employment Report

Today's U.S. employment report was somewhat stronger than last month's report, but not really strong in absolute terms.

The household survey was quite weak, showing a job loss of 181,000. This was the third consecutive decline in household survey employment, with a cumulative job loss of 495,000 since April.

There were however some stronger spots in the payroll survey, most notably the increase in the average work week. Average hourly earnings also again increased, though probably not by enough to compensate for the inflation that probably occured.

Overall, the report suggests that growth is still above zero-but not by much.

Employment Report Difficult To Interpret

The U.S. employment report was relatively weak in an absolute sense, with both payroll employment and aggregate hours worked down.

However, given the weather related disturbances, the numbers weren't that bad. Since the exact impact of the weather factor is unknown, we'll have to wait until at least the next report to get a clearer picture of the underlying employment trends.

Another Mixed U.S. Employment Report

Yesterday's employment report was a mixed bag. More specifically, the household survey was weak while the payroll survey was strong.

The household survey saw a reversal of the gains of the previous months, as employment fell by 330,000. It was only because the participation rate fell that the unemployment rate didn't rise. The employment to population ratio fell tp 58.3%, the second lowest employment rate(Only in December 2009 was it lower, at 58.2%) during the latest decade.

By contrast, the payroll survey showed relative (at least for being this recovery) strength, as not only did it show an increase in private sector employment of 159,000, it also showed an increase in the average work week. Average hourly earnings also gained by 0.2% in nominal terms, but after inflation this number might be negative.

So we have in short a household survey that indicates recession and a payroll survey that indicates growth. Since they are supposed to describe the same thing, they can't both be right. The payroll survey is usually considered more reliable by most economists, including me, when it comes to mothly fluctuations so the truth is probably closer to it than to the household survey. But the household survey indicates that it might exaggerate labor market strength somewhat.

Another Mixed U.S. Employment Report

Like many previous employment reports, the August 2011 U.S. employment report contained mixed signals from the household and the payroll surveys. Except that this time, the household survey was actually stronger.

The household survey showed a gain in employment of 331,000, following a cumulative decline of 483,000 in June and July. This illustrates why it is probably less reliable than the payroll survey in terms of monthly fluctuations. It could be noted that the yearly increase is still a lot weaker than in the payroll survey (up 0.25% versus a 0.95% gain in the payroll survey).

The payroll survey by contrast showed no change in employment after several months gain. What made the payroll survey even weaker was a 0.4% drop in average weekly earnings (composed of a 0.1% drop in average hourly earnings and a 0.3% drop in the average work week) that given the flat employment number also implies a 0.4% in aggregate labor earnings. A upward revision in previous numbers however partly offset this weakness.

U.S. Employment Report Even Weaker Than It Seems

The U.S. employment report yesterday was regarded by the markets as a bullish one, because the decrease in payroll employment was somewhat smaller than expected. However, considering how the Bureau of Labor Statistics continue to insist not only on continuing to impute jobs from the "Birth/Death" model, but in fact imputes more and more of them, even as any honest observer would expect fewer and fewer (in fact at this point none at all, or even negative) jobs created in new businesses relative to the number destroyed in business failures, it should be clear that job destruction is accelerating.


In February, the assumed seasonally adjusted monthly addition from the Birth/Death model (The raw monthly number is seasonally unadjusted. I've calculated the adjusted number by taking the total number added during the latest 12 months and dividing it by 12) was 53,000, in July it was 71,000. This means that the payroll number is in fact getting more and more distorted by this flawed model.

If you add the 71,000 imaginary jobs added by the model to the 76,000 private sector jobs lost according to the official number, then we're talking about at least 147,000 fewer private sector jobs.

This weakness was also confirmed by the rise in the unemployment rate from 5.5% to 5.7% and the decline in aggregate hours worked of a full 0.4%, a decline confirmed by the even sharper increase in the household survey of part-time unemployment. All of this suggests the opposite interpretation of the report compared to the one the financial markets decided for: namely that it indicates an accelerating and not decelerating downturn.

Commodity Price Boom Reflected In North American Job Numbers

Today employment numbers were released for both the United States and Canada. The U.S. report were mixed with fairly strong employment growth and slightly falling unemployment rate, but with only a slight increase in average hourly earnings, a increase so weak that it will likely be negative after taking into account for inflation. The Canadian report were unequivocally strong, with very strong employment growth, falling unemployment and wage increases well above inflation. Compared with a year earlier however, Canadian employment growth were somewhat weaker than in the U.S.

One interesting aspect neglected by most economic analysts is the strong effect of the commodity price boom on these numbers. I have previously covered how Australia have benefited from the commodity price boom. Yet other net exporters of commodities have also benefited, and that includes Canada. The U.S. have as much natural resources as Canada and Australia, but because the U.S. have more than 9 times as many people as Canada and nearly 15 times as many people as Australia, it consumes so much natural resources that it is a net commodity importer. For that reason, the U.S.as a whole loses from rising commodity prices, unlike Canada and Australia.

But U.S. commodity producers benefit of course, something we can see in this report. Overall, aggregate hours worked in the U.S. private sector rose 2.6%, while nominal average hourly earnings rose 3.4%, implying a increase in nominal labor income of about 6%. But in the natural resource sector, aggregate hours rose a full 7.2%, while average hourly earnings rose 6.7%, implying a total increase in labor income from the natural resource sector of 14.2%.

The same thing goes in Canada where overall employment rose 2.1%, but employment in the sector "Forestry, fishing, mining, oil and gas" rose a full 8.6%. No sector breakdown for hourly wage increases is available for Canada, but as hourly earnings in the most natural resource rich Canadian province, Alberta, were a full 7.0% versus the Canadian average of 3.5%, it seems safe to assume that wage increases in the commodity sector greatly exceeded that of other sectors.

Alberta have had much stronger growth than the Canadian average in recent years for two reasons. First is the already mentioned factor of its vast natural resources and second is the fact that it is a more conservative province than the rest of Canada and so have lower taxes and less regulations. Alberta have a employment rate of 70.6% versus the Canadian average of 62.9% and its unemployment rate is only 3.4% versus 6.3% for Canada as a whole. The strong income gains in Alberta have pushed up the value of the Canadian dollar to multi year highs against the U.S. dollar, something which have increased problems in manufacturing intensive Ontario and so increased the regional divide in the Canadian economy.