Friday, January 06, 2017

Sometimes math isn't hard but it scares people anyway

As you can probably tell, I've grown tired of tilting at windmills trying to get people to ignore the monthly jobs reports that come out from the Bureau of Labor Statistics because it is my opinion that when you start attempting to measure an economy as large as the US economy with statistical models, the models amplify measurement errors and the resulting headlines are usually just noise.

I'll go with my standard response when it comes to the unemployment rate - if the unemployment rate was really 4.7% do you think Bernie Sanders wins 20+ states in the primaries and Donald Trump wins the vote in the Electoral College?  Of course not, if unemployment was really 4.7% everyone would want the status quo (ie, Sec. Clinton) to continue on the path to prosperity.

However, since the Dow Jones has finally decided that today might be the fateful day to break through 20,000 I thought I should talk about the jobs report if only to highlight why it's so difficult to take the headlines seriously.

First a note on the Dow crossing 20,000 - it's just a round number and the Dow is a meaningless index that no one really cares about (except the guy talking to you on the evening news).  The Dow (and all stocks) have spiked since the election for a variety of reasons, none of which convince me that this is a good time to be buying into one of the most expensive markets in history.  Depending upon your choice of tools this is either the first, second or third most expensive stocks have ever been - only 1999/2000 and 1929 were worse.  Hey, but put on your 2017 hat and pop some champagne tonight because in 6-12 months you'll be longing for some good memories.

Okay, what's the big news today in the jobs report?  Whoa 2.9% wage growth!!! On the surface that sounds great, however, there's a little was a little fuzzy math that got to that number.  To get wage growth the BLS takes the average weekly paycheck and divides it by the average number of hours worked (again these are all basically numbers pulled from various surveys that are extrapolated).  When looking at the numerator in that equation - the weekly paycheck - I saw that it was roughly the same as in October so why is everyone getting so excited?

I'll use round numbers to demonstrate....

Let's say the average paycheck was $1,000 and the average number of hours worked was 40, you'd have an average hourly wage of $25.  However, let's say the average paycheck remained $1,000 but the avg hours worked fell to 39.5, then the average hourly wage JUMPS to $25.31/hour.  Wow, that's awesome!!!

Do you see how we magically increased the common man's pay? He's making an extra 31 cents an hour!!

However, the fictional common man, might say "Umm, thanks, but the if you'll notice my weekly pay is still $1,000 so while your model shows I got a pay increase, what I really got was the same pay for working 6 minutes less every day."

This is a simplification, but this is what drove about 25% of the "wage growth" reported in the December jobs report. The average number of hours worked fell while the weekly earnings grew slightly (about $20 for the yr).

So, in summary, this jobs report was much like all of those of the past 8 years - based on low-end jobs (retail, restaurants), freelancers and healthcare.  Not a lot to celebrate but go ahead and party like it's 1999 tonight.

I have a backlog of about 20 stories to cover - there are some really interesting things coming up.


1 comment:

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