Alasdair Macleod – 13 February 2015
On Friday 6th February the American Bureau of Labor Statistics (BLS) released its employment estimates for January, which being better than the market expected, caused Treasury bond yields to rise and precious metals to be marked sharply lower.
Earlier that week Jim Clifton, Chairman of Gallup wrote “The official unemployment rate as reported by the US Department of Labor is extremely misleading.”
His comments attracted notice, not least because Gallup is an independent company whose business is statistics. Furthermore, it is unusual for a senior business figure to criticise a government department so openly. His basic point is that if you are unemployed and have stopped looking for work in the last four weeks you are no longer classified as unemployed.
Furthermore if you perform a minimum of one hour of work in a week and are paid at least $20, you are deemed to be employed. And so on.
This is hardly news to those of us who have been sceptical about official statistics. The fact is there are even on BLS numbers 102 million adults deemed not in the labour force or officially unemployed. Then there are those who are only partially employed, but counted by the BLS as employed. As Jim Clifton points out if we add these 34.7 million people to the BLS’s 102 million figure, only 44.2% of US adults are actually employed for 30 hours or more per week; in other words fully employed by any common-sense definition.
This is the true indication of the state of employment in the US. The BLS could be more up-front in presenting its numbers, but being a government department we have to accept that it presents these figures in the best possible light. However, they are completely open about their methodology, and any member of the public can make his own assessment. So assuming caveat emptor should apply, the fault for accepting the BLS headline without question lies with the investing public, careless enough to be egged on by sell-side analysts and the media.
The result is markets move on what amounts to state-sponsored disinformation. Unemployment statistics are only one example of the fodder for the groupthink that has become the bedrock of macroeconomics and financial analysis. Groupthink is “a psychological phenomenon that occurs within a group of people in which the desire for harmony or conformity in the group results in an irrational or dysfunctional decision-making outcome”. This definition from Wikipedia describes the relationship between US government statistics and financial markets to a tee.
It is a shame: employment statistics have the potential to be the one number in macroeconomics that tells us the true state of the economy. The two other major variables, GDP and price inflation, are badly flawed. Nominal GDP tells us the quantity of transactions, not quality, ranking wasteful government spending equally with consumer-driven economic progress. Furthermore, government statisticians use every trick in the book to under-record rising prices, otherwise no growth in real GDP would have been recorded since the Lehman crisis.
We cannot claim that the true state of the US labour market is concealed from us. We need to think for ourselves and not dismiss from our minds comments by the likes of Jim Clifton of Gallup. That we do, is evidence that “irrational or dysfunctional decision-making outcomes” drive our statistical interpretation and therefore all financial markets, and is not to be confused with rational analysis.