What's behind today's jobless numbers? Understanding monthly employment reports

The various employment reports coming out of Washington have taken on an importance not seen in a generation, but how many of us really understand the jobs or unemployment numbers? I suspect we have less of an understanding than we should, especially given the critical impact employment has on commercial real estate. For example, N.Y.C. lost (net) about 175,000 jobs since Summer 2008 - potentially 35mm s/f of office space, or about 7% of all inventory. The underlying data gathering and analysis process is exceedingly complex and reveals that these numbers must be disaggregated and trended. Monthly employment reports contain two widely reported numbers. The Bureau of Labor Statistics releases data on the first Friday of each month. The unemployment number comes from the Current Population Survey (CPS), commonly referred to as the "Household Survey." The jobs number comes from the Current Employment Statistics (CES) survey. The CPS identifies 72,000 households across 824 areas nationally, reaching about 60,000 (of which 6-8% fail to respond). The survey covers a week that must include the 12th and counts only those 16 or over that are non-military and non-institutional. Households are surveyed for two 4-month periods with an 8 month break in between to balance the need for statistical robustness in consistency with the household burden of continuous response. The raw data then undergoes literally dozens of complex statistical adjustments. CPS classifications are employed, unemployed and not in the labor force. This last category recently caused large fluctuations in reported statistics as historically high numbers of people have left the workforce. The workforce is the denominator in the unemployment calculation and has shrunk for only the second time since WWII. Had it maintained its post-war trend of about 1% annual growth, unemployment would now be about 10.5%, not 9.7%. Another notable headline unemployment number is "U-6," currently 16.5%. The broadest measure, it includes those employed part time for economic reasons and those who looked for a job recently but couldn't find one or gave up. On the other hand, the CES surveys approximately 140,000 businesses, accounting for about 400,000 worksites (1/3 of the non-farm payroll workforce). This reports on jobs, hours, and earnings. About ¼ of the survey respondents are rotated out annually and estimates are revised twice in consecutive subsequent months and finally in an annual benchmarking process. Similar to the CPS, the subsequent statistical manipulations are exceedingly complex, with some formulas surpassing 30 Greek (mathematical) characters. One of the most important adjustments occurred in the birth/death model, where business formation and failure rates are re-estimated annually. This adjustment just increased the cumulative estimated jobs lost during the Recession from 7.2mm to 8.4mm. Jobless claims (for unemployment insurance) numbers, though widely reported, are a relatively poor overall employment measure. Not everyone qualifies for benefits (self-employed, unpaid family workers, seasonal employees, etc) and many don't file claims. In fact, only 36% of the unemployed received benefits in 2008. The CPS and CES must be reviewed together given their different participants and definitions (e.g., CES doesn't survey self-employed individuals). Data should be trended across three months or longer as the underlying process yields statistics heavily manipulated to manage inherent volatility and inaccuracy. Indeed, the CPS requires a 400,000 change in jobs to be statistically significant (CES requires 107,000). Keep that in mind the next time you review employment data. Underlying numbers on job gains and losses by industry, geography and workforce segment and the composition of labor participation are far more instructive than headline numbers. I see several recent positive trends: temp hours are up so businesses are starting to hire, labor participation gains show people are looking for jobs again and job losses are smaller and concentrated by industry and geography. Historically, sharp downturns generally create sharp recoveries and I suspect many businesses are operating at unsustainably thin levels. However, people who leave the workforce create a kind of "shadow inventory," dampening statistics later as they reappear - the opposite of today; this is a well documented cyclical employment phenomenon. However, we will need strong organic job creation, not statistical improvement from cyclical balancing, to achieve sustainable economic growth and positive net absorption of all the vacated office space. Andrew Lester is the managing director, investment sales at CPEX Real Estate, Brooklyn, N.Y.