Bernanke's Potentially Optimistic Jobs Picture

In a November 2003 speech that then Federal Reserve Governor Ben Bernanke gave to the Global Economic and Investment Outlook Conference at Carnegie Mellon University, he talked about the two major monthly employment series published by the Bureau of Labor Statistics (BLS). These are the well-known nonfarm payroll job series based on an employer survey and the civilian employment series based on a household survey. In assessing the two series, Mr. Bernanke concluded that, while both were valuable, "somewhat greater reliance should probably be placed on the payroll survey." (The full speech is available on the Fed's Web site.)

Since Mr. Bernanke is now Fed Chairman, and considering that employment of late has turned around and is beginning to rise, his reading of the job market takes on special significance.

To zero in on the chairman's job perspective, it's useful to update an earlier statistical exercise I indulged in (RCM July 26, 2010). The object was to construct a single jobs series based on Mr. Bernanke's assessment of the two major employment data sets consistent with the above quote. Accordingly, I assigned a two-thirds weight to monthly changes in the payroll series and a one-third weight to changes in the household employment series (both seasonally adjusted) to arrive at a single series which reflects the chairman's view of the job situation.

This time, however, as a further refinement, the household data used in the weighting calculation have been adjusted to be consistent with the definition of payroll jobs. The household series has also been smoothed to correct for the disrupting effects of population control revisions introduced into the household data this January.

The BLS publishes on its website a civilian employment series based on the household survey data that is adjusted to the definition of payroll jobs and smoothed for population control revisions. The definitional adjustment subtracts out agriculture, self employment, unpaid family workers, private household workers, and workers on unpaid absences from total employment, and adds in nonagricultural wage and salary multiple jobholders.

What does the weighted "Bernanke preferred job count" show?

The job situation finally started improving last fall. Between November 2010 and March 2011 regularly reported payroll jobs rose by 630,000 or by an average of 157,500 a month, a modest but welcome gain, though only slightly more than the normal monthly increase in the labor force from growth in the working-age population. However, because of a stronger pickup in household-measured employment adjusted to the definition of payrolls, the estimated "Bernanke preferred" weighted job series rose by 835,000 between November and March, or by an average of 208,750 a month, a much improved performance.

In the same period the unemployment rate fell sharply, by a full percentage point, from 9.8 percent to 8.8 percent. Considering the modest showing in officially reported payroll jobs, the unemployment drop was in good part a puzzle. Based on the stronger household-adjusted jobs data, however, it makes a lot more sense and lends credibility to Mr. Bernanke's jobs perspective.

The adjusted payroll series since November exceeded the officially reported payroll series by an average of 51,250 jobs a month. If that job bonus continues, it will add an extra 615,000 jobs to the economy in a year's time, enough to reduce the unemployment rate by about 0.4%. That's in addition to any further improvement in jobs from other sources.

If Mr. Bernanke hasn't changed his assessment of the two major employment series (he hasn't said so), then presumably he's seeing a better jobs picture than most. (Some economists would give an equal weight to household and payroll employment, which would imply a job recovery even stronger than the estimated Bernanke-preferred series.)

What might the chairman's job series imply for monetary policy?

A stronger jobs recovery and a consequent boost to economic growth would mean that the latest round of quantitative easing (QE2) could end sooner than expected, or at least wind up in June as planned, without another extension.

Also, core and headline inflation have been tilting up in recent months. A stronger job market could bring some life to wages and boost demand, increasing the risk that the recent run-up in energy and other commodity prices (which may not be as transitory as the Fed chairman thinks) will continue to spill over into or be joined by a broader rise in headline prices. Businesses currently facing sharply higher costs can't absorb them forever, and if demand strengthens, it's likely firms will begin to raise consumer prices in the not too distant future. In such an environment it wouldn't be surprising if the Fed's Open Market Committee perceives a threat to underlying inflation and decides to raise the federal funds rate before year-end.