The primary appeal of the Establishment Survey over the Household Survey is its lack of volatility. It is believed that gives the observer a greater degree of precision in estimating monthly changes in employment. In the case of the government shutdown in October, it appears as if that view has been confirmed.

The Household Survey showed a very large decline in October (-735k), attributed to layoffs in shutting down “unnecessary” government functions. That was, as expected, reversed in November (+818k) as all normal governmental operations were reopened and employees returned. While there was dramatic volatility in the Household Survey, the Establishment Survey showed steady growth: +200k in October; +203k in November. Proof that the lack of volatility equals precision?

It would be easy to suggest as much given the behavior of the two surveys these past few months. But volatile or not, the net effect in the Household Survey was two-month job growth of just 83k; while the Establishment Survey showed 403k. So the same divergence we have been highlighting for a year has again played out, this time across the government shutdown. Volatility or not, the net trend is wholly dissimilar, which should be more alarming given that the two surveys more or less agree across longer time periods.

With such a dichotomy continuing to be so apparent, it’s left to common sense and corroborative evidence. In all honesty, the primary appeal of the Establishment Survey is not the lack of volatility, per se, but the how that “smoothness” is perceived. The theory behind the statistical adjustments needed to create such “precision” is most acceptable to conventional economists. Therefore, because conventional economists readily accept the theory, they also readily accept the premise. Everyone else, media in particular, simply goes along because of the logical fallacy of the appeal to authority. Who would know better, lay observers or economists?

That’s a rhetorical question in my mind, particularly since economists have had a very rough ride the last few years (decades?). Given that, perhaps challenging their conventions would actually be wise, rather than the domain of conspiracy theory.

There really is no need of conspiracy here, simply bad theory put into practice. I am challenging the mainstream interpretation with estimated data created by the very same people and agencies that produce the accepted versions.

ABOOK Dec 2013 Payrolls Comp Since Jun 13

To get a better sense of this, we need only go back to June of this year. Beginning with July, the Establishment Survey estimates total payroll growth of 905k. The Household Survey shows an increase of just 328k, including both ends of the government shutdown volatility. Which is more accurate?

Over the same months, the Civilian Non-Institutional Population (potential labor force) grew by just over 1 million people. The overall unemployment rate fell dramatically from 7.6% to 7.0%! That occurred at exactly the same time that employment, even at the higher Establishment Survey rate, was less than population growth. So, even by the “best”, or most charitable, estimation there is still a large discrepancy.

In the same five-month period, the total labor force actually declined by 541k people. Again, that includes (though it really shouldn’t have an impact here) the government shutdown. The Labor Force fell by 720k in October, and only regained 455k in November; for a net drop of 265k. That kind of decline, particularly over a five-month period, has always been associated with a declining economy and recession.

In fact, the labor force has actually contracted on a Y/Y basis in November (also October, but we can set it aside as potentially tainted by “volatility”), an ominous (and unambiguous) signal.

ABOOK Dec 2013 Payrolls Labor Force

The timing of the most recent labor force decline shows back to October 2012. That was the same month that the great divergence between the Establishment Survey and the Household Survey opened.

ABOOK Dec 2013 Payrolls Comp Since Nov 10ABOOK Dec 2013 Payrolls Comp Since Oct 12

We can continue to rely on the “best and brightest” economists as they uncritically accept the conventional version, or we can use common sense to put together a more inclusive study and analysis. That would also extend to recent sales activity, since job growth is the largest component of consumers’ willingness to indulge.

A 200k per month average would still be a concerning number given the preponderance of plucking expectations. Again, it is not even enough to keep up with population and labor potential. But beyond that, any open-minded observer would have to at least countenance the idea that something beyond just the dissatisfactory may have been in occurrence since last October. There is too much consistency in corroborative and related data to simply ignore it. Doing so amounts to the same kind of wishful thinking we saw the last time cyclicality was being debated.

 

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