Don’t Let the Jobs Report Choose the Next U.S. President
Would you want a random-number generator to decide who will be the next U.S. president? Ludicrous as it sounds, something like that could occur Nov. 2, when the government releases its monthly jobs report.
The employment report, released at 8:30 a.m. on the first Friday of most months, offers one of the earliest indicators of the state of the U.S. economy. As such, it tends to have a big impact. The change in nonfarm payrolls and the unemployment rate have become front-page news in a nation searching for signs of recovery from the worst slump in a generation. A surprise of even 50,000 jobs can move markets.
This week’s report on the October jobs picture could be particularly consequential. It comes four days ahead of a closely contested presidential election in which job creation has been a central issue. A big payroll number, or another drop in unemployment, could tip the outcome in favor of President Barack Obama. A poor report could be just what Republican candidate Mitt Romney needs to convince the nation that it’s time for a change.
It’s bizarre that the jobs numbers can wield so much influence, given that they often bear little relation to what’s actually happening in the economy. The fact is, it’s just plain difficult to measure in real time how many jobs the economy has produced in a month. When the Bureau of Labor Statistics estimates the change in nonfarm payrolls, for example, it is trying to pin down a tiny shift -- a matter of thousands of jobs -- in a labor pool of more than 130 million people. Even with a sample of about 141,000 employers, that’s a daunting task.
The challenges of measurement translate into large margins of error. When the BLS says the economy created 100,000 jobs in the previous month, it actually means it’s 90 percent sure that the real number is somewhere between 9,000 and 191,000. The same is true of unemployment: If the reported rate is 7.8 percent, the true rate could be anywhere between 7.6 percent and 8.0 percent. A shift of 0.2 percentage point in unemployment -- enough to jolt bond yields and set pundits jabbering -- does not even breach the threshold of statistical significance.
Revisions to the jobs numbers demonstrate how misleading the preliminary data and the conclusions people draw from them can be. In the first eight months of 2008, for example, employment reports showed small declines of about 20,000 to 60,000 jobs a month, suggesting the developing financial crisis would be mild. The stock market held up, and economists raised their growth forecasts for the year. Now, revised numbers show that the economy began shedding about 200,000 jobs a month beginning in April 2008, a decline that would have pointed to the deep recession the country was entering.
More recently, in early September, the Labor Department reported that monthly job growth had slowed to only 96,000 in August -- a piece of bad news that dealt a blow to Obama the morning after his acceptance speech at the Democratic National Convention. By early October, when the number was revised up to 141,000, hardly anyone was paying attention.
What to do? Recognize the preliminary jobs numbers for what they are: an early guess. The BLS could encourage such an approach by making some modest changes in the report. Instead of featuring preliminary estimates for a single month, it could provide averages of the unemployment rate and of the number of jobs created in the most recent three months. This would give the news media and the investing public a more accurate read of the trend. Those who want to dig more deeply into the report would be free to do so.
Whatever surprises the Nov. 2 report might contain, it won’t change the broader state of the U.S. economy. Since the beginning of the year, nonfarm employers have added an average of 146,000 jobs a month -- enough to make a small dent in the unemployment rate, the three-month average of which has fallen to 8.1 percent from 8.5 percent. The slow rate of recovery, typical for the aftermath of a full-blown financial crisis, is threatening to do permanent damage. Long bouts of joblessness are eroding the skills and motivation people need to get back to work.
Our advice: Vote for the candidate who you think can help repair the economy. Don’t let one month of fallible data change your mind.
Today’s highlights: the editors on the tax initiatives on California’s ballot; Clive Crook on why Obama is the least bad choice for the U.S.; Peter Orszag on a tax refund that could solve the fiscal-cliff impasse; Part three of A. Gary Shilling’s series on who loses when the Fed keeps interest rates low; Part one of Virginia Postrel’s series on missteps by breast-cancer charities; Tim Judah on the rise of the far-right party Svoboda in Ukraine.
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