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Special Report by Jim Shepherd

Manipulated Jobs Reports

The importance of statistical data that is gathered, assembled and released by the various agencies we depend on for such information cannot be understated. Individuals, corporations, governments and investors, both large and small, adjust their plans based on the honesty and reliability of that data. During the last few years there has been growing concern and doubt about the accuracy of the job creation data being released. In fact there is growing evidence that it is being intentionally manipulated to paint a rosier picture about the strength of economy than is supported by other data.

In all the years that I have been watching the release of data by the various government departments, I have never seen such nonsense as that associated with economic data produced by the Labor Department in their presentations of the non-farm payroll reports.

In its March 5, 2005 report, the US Department of Labor stated that nonfarm payroll employment increased by 262,000 jobs in February and the unemployment rate edged up to 5.4%. However, in the same report, they stated the total employment was unchanged at 140.1 million, seasonally adjusted.

So, how did the Labor Department add 262,000 new jobs to the existing 140.1 million workers already in the workforce and have the number remain unchanged while stating that the unemployment rate edged up from 5.2% in January 2005 to 5.4% in February?

As we can see this sort of reporting has been going on for some time. For one of the most blatant attempts to paint a picture rosier than it really is, one should look at their report released back on April 2, 2004, where they stated that 308,000 jobs were created. Sounds good doesn't it? Unfortunately, it's one of those half-truths that career Washington bureaucrats are so fond of telling us.

Yes, unemployment looked good if you were willing to flip burgers or toil in a low paying, part-time, service sector job. But the Labor Department wanted you to believe that the economy was strong and there was no need to be defensive. Investors were also being told by the media to jump back into the stock market ASAP.

In its next report, the Labor Department confirmed that only 8,000 new, full-time jobs had been created in March 2004. So, in the example of 308,000 new jobs being created, here is the bottom line - 300,000 of them were temporary or part-time positions, which was exactly what I had been telling my subscribers.

During the run up to the latest Wall Street debacle (the sub-prime mortgage one) there continued to be a plethora of data coming out of Washington that was frankly unbelievable. During 2007, the problems being created by the sub-prime debacle really began to unravel and in the process the frailties and real weaknesses of the economy began to become apparent, as did the truth about the strength of the jobs market. The following 2 charts illustrate the difference between job creation over the last few years (2004 - 2007) compared to job creation during a period when the economy was considerably stronger (1997 - 2000) when it was able to produce a sufficient number of new jobs to more than accommodate the new entrants into the workforce.

Source: Federal Reserve Bank of St. Louis

Source: Federal Reserve Bank of St. Louis

As is evident in the top chart, the average monthly job growth has been far below the threshold needed to offset the new entrants into the workforce, namely 200,000 per month and furthermore most of that job growth was mainly due to temporary, part-time positions. Those types of jobs pay far less than the millions of manufacturing jobs that have been lost over the last number of years. The second chart depicts the strong job growth leading up to the end of the great bull market for stocks (1982 - 2000). During the last few years the Labor Department's monthly non-farm payroll reports have been systematically presented as being positive in the initial report and then revised lower in subsequent months, when the impact was easily overshadowed by a new and usually upbeat (and often manipulated) number. Every month we got new data that was breathlessly reported as being wonderful when in reality it was pathetic. Yet, no matter how the data is manipulated, the U.S. economy cannot sustain itself by replacing large numbers of high-paying manufacturing jobs with insufficient numbers of lower paying service sector jobs. Ultimately, we must produce products that create well paying jobs and sell goods that other countries wish to buy or we will continue to sink deeper into trade and current account deficits and in reality, deeper into debt.

The employment problems that I have been warning my subscribers about are now beginning to become a very visible problem as we begin a new year and I'm sure things will deteriorate even further as we progress into 2008. In the past the argument has been made that there is nothing to worry about because the labor market was so strong. Why is strong job creation so critical to the growth of the economy you may ask? You see, the US economy is now dependent on consumer spending for over 75% of GDP. So consumers are now the main engine drivers of our economy and when job creation is weak and when unemployment is actually rising, it's difficult to imagine how the economy can continue to grow. To say that a dubious employment picture will be able to stave off recession in the face of growing problems in the economy is a little Pollyannish to say the least.

If you need further proof that the jobs market has been progressively getting weaker - in spite of the impression left by the glowing non-farm payroll reports coming out of the Labor Department - you need look no further than the February 1st 2008 report (for January) clearly showing the economy lost its ability to produce new jobs. In fact the January report proved that the economy is slowing so dramatically that it could not even produce sufficient low paying service sector jobs to produce a positive headline number that the Labor Department could revise lower in subsequent reports. In fact, for the first time in several years the economy actually lost 17,000 jobs during January and the job growth for two of the three previous months was revised dramatically lower also.

Jim Shepherd
Jim Shepherd,
Founder and President

you will see the dollar soar, commodities and stocks collapse, and bonds rally strongly.

the lopsidedness of current opinion with respect to the dollar is telling me that a substantial bounce is at hand. In the period leading up to the crash of 1987, the US dollar was also weak. I believe the odds of a deflationary environment emerging are in the high 90% range - and if it does, you will see the dollar soar, commodities and stocks collapse, and bonds rally strongly.

- James A. Shepherd
Barron's Marketwatch and a recent newsletter
October 12, 2007