Despite Weak Jobs Growth, Unemployment Falls Again. Why?

The headline job growth announced by the Bureau of Labor Statistics on Friday (link to the report provided above) came in well below analysts expectations at only 113,000 – less than needed to keep pace with growth in the labor force.  Yet, unemployment fell again, from 6.7% in December to 6.6% in January. 

The household survey portion of the report – the portion used to calculate unemployment – was completely out-of-synch with the establishment survey.  That’s not so unusual, but the reason for it was.  Usually it’s because the government relies upon the explanation that more people have mysteriously dropped out of the labor force.  But this time, 523,000 people were actually added back into the labor force, which should have sent unemployment soaring.  Instead, it fell by 0.1% because the “employment level” – the number of people that the household survey says has jobs, inexplicably soared even more by 638,000.  So how do you reconcile those two numbers – a measley 113,000 jobs added by the establishment survey and 638,000 according to the household survey?

Here’s what I believe happened.  At the end of December, unemployment benefits expired for over a million long-term unemployed workers.  When you’re eligible for and collecting unemployment, you must answer “no” on the unemployment form when asked if you’ve found work, in order to remain eligible for your benefits.  If you happen to also be included in the household survey, you’d better answer “no” to that one as well, right?  If you’re collecting unemployment, you’re probably picking up a few bucks here and there babysitting and doing odd jobs, but you’re not going to report that. 

But, once the unemployment benefits are taken off the table, you no longer have that constraint to answering the household survey honestly – a survey which considers you employed even if you earn only one dollar that month as pay for some service performed.  (And it’s a survey for which there was no penalty for dishonestly responding “no.”)  Suddenly, thousands are free to answer honestly that, yes, they made a few bucks babysitting, or helping some contractor friend for a few bucks paid in cash.  Extrapolated to the general population, those now-honest responses add hundreds of thousands to the employment level. 

Regardless of this artificial drop in unemployment, the economy isn’t improving.  Following two quarters of real pre-holiday binge spending-driven growth in the economy, data since the beginning of the year shows an economy that’s faltering once again.  Mortgage applications continue to decline.  Manufacturing is slowing.  New factory orders fell by the most in 33 years in January.  Exports fell as well.  Retail sales growth slowed to zero in the last week of January. 

So January’s employment report is another aberration, on the heels of two other monthly aberrations caused by the government shut-down in November.  Let’s see what happens next month.

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