The news was electrifying just one month before the election. Unemployment rate down to 7.8%! Decent gains in employment all around! After an August report so dismal it spurred the Fed into action with an open-ended round of mortgage buying, QE3, how could September’s come in so strong?
The answer is obvious to longtime readers of Barataria, since it was called when the August report came out. We’re seeing fluctuations caused by sketchy methods of calculating the state of jobs, a small number found by subtracting a big number from another big number. Indeed, the best part of the gain came from adjusting July and August up by 89k jobs total.
Underneath the big story is a much bigger story that is going unreported through this gradual turnaround. We are witnessing the printing of a strong bottom, a floor in the overall employment picture where we are roughly treading water. What makes this possible, and hard to report, is the net gain of jobs in unexpected places that the traditional survey is having a lot of trouble finding.
Let’s start with the numbers. Once again, the ADP report of jobs was stronger for September, showing a net gain of 162k versus the 114k in the Bureau of Labor Statistics (BLS) report. This marks five straight months that the ADP report has been ahead of the BLS , suggesting that something complex is happening. With ADP revising their July and August reports downward a notch, however, we find that the two reports converge pretty closely after about three months of reporting with all the adjustments.
The ADP report is compiled by the largest processor of payroll in the US. It’s roughly a measure of how much work they have in a given month. It’s just a much more accurate and less noisy month by month picture of what’s really going on, and it generally catches job gains before the BLS survey can find them all.
The reason this is important is not clear, but we can take a hint from another piece of news reported recently. Big banks have seen their return on equity (ROE) go up 24% since 2010, a decent gain. But smaller community banks have seen their ROE rise 224% in the same period. Why the big difference? Because small community banks manage risk very differently, usually on a personal level. Their loans are smaller and more characteristic of a partnership with local entrepreneurs. Where big banks are fretting about Europe and global problems, local banks are loaning money to people who are making things happen. And boy, are they happening!
This doesn’t directly inform the jobs data. But it does give us a clue as to where jobs are being created – and why they are hard for the BLS to find. Small businesses, many of whom outsource payroll to ADP, are indeed forming and paying back loans to banks with the courage to make small plans along with them. This is exactly what we would expect as the economy restructures and people who need work find a way to take advantage of good ideas they’ve come up with. A lot of personal risk and a small business loan may not be the easy life, but it beats sitting around unemployed. And, apparently, it’s working.
All of this data, together, is exactly what we would expect at the bottom of the economic cycle. Naturally, a wave of bad news washing over the bigger banks might yet derail the restructuring and success that these new entrepreneurs are finding. Barring that, things are working out about like anyone should expect.
Democrats are crowing about the headline unemployment rate, but we all know it’s not quite good enough. That’s OK. The real story is far, far away from politics and all the big picture stuff that makes the big news from one month to the next. Things are not down and then up, things are … going along. It’s about right. You want something to celebrate? A turnaround coming more or less on schedule by 2016 may not sound like much, but it’s a really good story if a reporter wanted to do a lot more than tell you about the implications of the release of another BLS figure.
We have another four years or so to get through, regardless of who is elected, but it looks good. As much as Barataria was chided in 2008 for being relentlessly negative, in 2012 it’s time to find the positive. Go ahead, laugh. The real story is always the derivative of what we read in the news, the rate of change is more important than where we stand now. Throw a party if you want, but let’s do it for the right reasons!