Straightening out the Labor Kinks

Jun 10, 2024

four women carrying file of bananas — Photo by Zeyn Afuang on Unsplash

I was going to go over the huge distortions in labor statistics that are misguiding the Fed in this weekend’s Deeper Dive, but those numbers revealed their own gross distortion when they came in at the end of the week strongly contradicting how jobs fell deeply in the first two reports of the week with rapidly soaring numbers in the government’s end-of-week report. Clearly, the stats are malfunctioning badly as you cannot have it both ways simultaneously.

Instead, I covered the news on the current state of the corporate zombie apocalypse that the Associated Press reported on last week. I made a Deeper Dive into the apocalypse because laying out how the zombie situation has grown since my 2022 predictions of a zombie apocalypse seemed a lot more interesting. (See “The Deeper Dive: Zombie Apocalypse Now.”)

So, we’ll cover the confusion in labor reports now because Wolf Richter brings out some huge errors in the malfunctioning numbers in an article linked to below today to help us understand why these metrics are so unreliable. Here are the high points:

First, Richter pays attention only to longer-term averages, such as three-month averages of labor changes, because the month-to-month and week-to-week figures are so volatile that the spikes, he says, are meaningless. What matters for understanding what is happening now is the short-term averages. He prefers a three-month average, which keeps things current but smooths out the noise.

The three-month averages overcome what I’ve called the jobs “head fakes” that are mostly just noise. If you look at the three-month average (red line), you can see there was no huge swing here. We’re basically still trending sideways:

More importantly to inflation concerns, wages increased by their most since January and are now at a +4.9% annualized rate if this growth were to be sustained. However, with the three-month average it would be +4.1%, which still doesn’t change us from just trending sideways, but wage growth is well above where we were for years prior to the pandemic because of the labor shortages, driving costs up in order to get laborers that remain in short supply.

That last emphasized part is my own point, not Richter’s, which I’ll explain now: Where I differ considerably from Richter is that he focuses on how strong the labor market is (and, therefore, the economy in his opinion) based on labor’s growth rate, as do all economists these days. In my views that seriously misses how truly terrible labor is.

In the graph below (green line added by me to make my point), Richter is impressed with how rapidly the labor market has grown from its pandemic crash (his red line). He’s right that this is extremely rapid growth, still rising faster than it did pre-pandemic. I, however, am much more fastened on the huge gap between that growth line and the previous trend (carried through by my green line).

I think the deeply important news here is how extremely far short the labor market remains from ever reaching back to the old trend. That gap between the two lines represents one thing—the huge and enduring damage created in the labor market by the pandemic lockdowns, the Covid deaths, long Covid and vaccine deaths and early retirements. (However you sort out what the actual causes among those possible causes are, the important thing is that a lot of labor died, got sick for the long term, or quit for good.) Labor simply is not what it used to be in meeting the needs of a growing population, and that is the huge driver in wages to try to attract a still-shrunken labor supply.

And here is why that is important: The previous trend roughly tracked population growth. The growth in labor may be rapid and may still be barely steeper than the pre-pandemic line, but it has fallen far short of that trend, and that means it has fallen far short of population growth; and, as it is flattening out, it appears it may never make up for all that was lost. It is still about three-million employed workers short of where we would have been on the long trend that had been consistent for many years that instantly was destroyed in 2020.

Moreover, as Richter mentions in his article, the Bureau of Labor Statistics has been grossly underestimating actual population growth because it has failed to adequately account of the Biden Boom that exploded from the nation’s southern border. (He explains how that happened further down.)

So, I am focused on the damage and not impressed by the rapid growth out of the Covidcrash because rapid growth (and FULL recovery) was expected by most economists from the beginning since we shut down the global economy by just throwing a master breaker and forcing unemployment. Theoretically, it was all supposed to start right back up when we threw the switch the other way. I argued BEFORE THE RESTART that it would appear like a quick recovery but that the damage would be huge, and that we’d only know the true damage when we waited long enough to see how much didn’t restart—how far we failed from getting back to the trend we had been on AND HOW LONG IT TOOK TO RESTART EVEN TO THIS LEVEL compared to how instantly we crashed when we threw the breaker off.

The damage was horrendous—even worse than I anticipated, and I was one of the few anticipating lasting damage. So, I was not, at all, impressed with the rapid restart, knowing that as quick as it was, it would wind up FAR from matching the free-fall into collapse that we were trying to recover from, and clearly the damage has endured. That is how extremely ill-advised those lockdown polices in the Trump era were.

Coming back to where we agree and to the error in population trends, Richter brings to light one major reason the employment/labor reports are at such disagreement with each other (therefore, unreliable for the Fed to use as gauges). Richter even explains that he is going to ignore some of the reports for awhile because they are just that ridiculous (until the bureau gets its errors recalibrated properly).

The Bureau of Labor Statistics also releases a trove of data from its survey of households…. All of this data is based on household surveys that are then extrapolated to the population estimates by the Census Bureau. However, the Census Bureau has underestimated the mass-migration in 2022 and 2023, and has therefore underestimated the population growth, and overall population.
The Congressional Budget Office (CBO), in its population estimates, picked up on the huge wave of immigration by also including data from Immigration and Customs Enforcement (ICE). It estimated that net immigration in 2022 was 2.67 million immigrants, and in 2023 was 3.3 million immigrants, the highest in its data going back to 2000.

That, as Richter notes, creates a huge distortion in the extrapolated data from the BLS Household survey.

Because the BLS extrapolates its household survey data to the wrong population estimates by the Census Bureau, it understates employment and the labor force and messes up all other metrics based on them. So we will no longer cover the household survey data for that reason until the Census Bureau revises its population estimates, which it does periodically. Right now, it just doesn’t make sense….We’re now waiting for a massive upward revision of the population estimates before we report on the BLS’s household data again.

It is truly messed up; and, if you combine this large error in estimating population growth as they make their adjustments with the error in perception that says labor is tight because the economy is strong and growing and not because of the severe lasting damage created by the Covidcrash, then you can see how likely the Fed is to be far off track on using labor as a gauge for when it is time to start cutting rates.

There is too much error in the data, and too much error in how tightness and growth are being perceived. It is not the growth rate out of destruction that matters. It is the huge gap that remains from where we were, especially when the population that this “recovered” labor has to serve has actually grown faster than the old trend and is being seriously undercounted because of the immigration boom. In my view, the gap represents how much the metrics need to be recalibrated when measuring norms. Right now the immigration count may be more important than the traditional birth-death model employed by the BLS.

So, until things are properly recalibrated, the Fed’s flight instruments are putting it hundreds of feet above its true altitude, which doesn’t bode well for a soft landing.

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Straightening out the Labor Kinks

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