Is the US unemployment rate being manipulated?

Last week’s drop in the US unemployment rate from 8.1% to 7.8% has fuelled speculation that the number may have been manipulated for political reasons. This article investigates that claim and reveals that the true rate of unemployment is actually 22.8%.

On Friday morning the US Bureau of Labor Statistics (BLS) announced that the unemployment rate in the US dropped to 7.8% in September.

The official release reports that “The unemployment rate decreased to 7.8 percent in September, and total nonfarm payroll employment rose by 114,000. Employment increased in health care and in transportation and warehousing but changed little in most other major industries.”

The drop of 0.3%, which follows a drop of 0.2% in August, flies in the face of a raft of other data that show a worsening US economy. Last month US second quarter GDP was revised down from 1.7% to 1.3%, while the Chicago Fed National Activity Index, which is designed to gauge overall economic activity, decreased to -0.87 in August from -0.12 in July.

The unexpected drop in unemployment has led to speculation that the data might have been manipulated for political reasons. Those questioning the numbers include the former CEO of General Electric, Jack Welch, Republican Congressman Allen West, Economic journalist Stuart Varney, and CNBC On-Air Editor Rick Santelli.

Mr Santelli has actually been predicting for some time that the current administration would get the unemployment rate down below 8% before the US Presidential election on 6 November 2012.

Is the US unemployment rate being manipulated?

The BLS conducts a monthly survey of households and calculates what is the official, or headline unemployment rate. However the number that they actually publish is subject to statistical modelling to produce the seasonally adjusted unemployment rate.

What that means is that the number is altered in order to factor out known historical variations. These variations occur for a variety of reasons, including the fact that retailers tend to hire extra staff to cover the Christmas period, and because teachers sometimes get additional work during their summer break.

In addition to seasonal adjustment, a few of years ago the BLS also began what it calls “concurrent seasonal adjustment”, meaning that they recalculate these seasonal factors every month. What that means is that the data is no longer comparable on a month to month basis.

As John Williams of Shadow Government Statistics, explained on Friday, “these concurrent seasonal factors get revised every month, so that last month when the August unemployment rate came out the Bureau of Labor Statistics revised all of the seasonal factors going back in time.” So although the BLS has the comparable monthly numbers, they do not publish them. It’s therefore impossible to compare the August unemployment rate with the September number on a consistent basis.

According to Mr Williams, the reason they don’t publish the numbers they actually calculate, is because “the are afraid it’s going to confuse data users”. This lack of transparency means that the numbers reported by the BLS cannot be verified, and that in and of itself raises the possibility that they might be subject to political manipulation.

Mr Williams, whose company exposes and analyzes flaws in US government economic data, believes that the rate of unemployment didn’t actually fall in August or September.

Alternate Unemployment Chart

Source: shadowstats.com

Why the US unemployment rate is actually 22.8%

Although the media focuses on the official U-3 unemployment rate, this number excludes certain groups of people. However the BLS actually publishes six different unemployment rates, U-1 to U-6 and it’s the U-6 figure that provides the best and broadest measure of unemployment.

The U-6 number includes two additional groups of people: Those who are not actively looking for work, but who have indicated that they want a job and have looked for work in the past 12 months. And those who are looking for full-time work but have had to settle for part-time work because full-time work is not available.

The BLS reports the U-6 unemployment rate as 14.7%. However, Mr Williams, whose firm uses the government’s raw data to recreate the true number, calculates the U-6 number as being 22.8%.

His work also exposes the manipulation of the payroll data. “The revisions that are being made to the seasonal adjustments are throwing jobs growth from the first half of the year into the second half of the year. So you get a boost in jobs growth in the second half of the year, but the first half of the year doesn’t get revised” so it stays looking good.

Interestingly, once a year in December the BLS goes back and restates its monthly data in order to make all the numbers consistent. So in our view it’s likely that at the end of the year we will see the recent unemployment numbers revised sharply lower. We shall watch with interest.

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