My economist friend Jack Tatom wrote the following on Facebook and gave me permission to share. For background, see my “Why the Drop in Unemployment Did Not Surprise Me,” June 5. It’s pretty involved and you might have to pause at various points to take it in, but it’s by far the best explanation I’ve seen. Here goes:
On Friday, June 5, the Bureau of Labor Statistics (BLS) announced the Employment Situation for May showing that the nation’s unemployment rate had declined in May from 14.7 percent to 13.3 percent, a shock to many who had expected a fall in employment of over 9 million and a rise in the unemployment rate to 20 percent. I was not among the shocked. I had expected employment to rise very sharply due to a reduction in the number unemployed.
The BLS added a footnote to their May report that indicates there had been an error in data submitted by survey takers who had counted many people as employed instead of as unemployed. The latter was the explicit instruction BLS had given for the treatment of furloughed workers who did not work during the previous week. According to the BLS, had the surveys been correctly completed, the April unemployment rate would have been shown as 19.7 percent and the rate would have fallen to 16.3 percent in May. [DRH note: Note that that still is a large fall in the unemployment rate; I believe it’s the largest one-month fall in recorded U.S. history.]
So, what happened and what does this mean? First of all, it means that in both months unemployment and the unemployment rate were higher than previously thought. That’s the bad news. The 20 percent unemployment rate expected for May nearly occurred in April. The good news is that this data shows the turnaround in the economy was actually bigger than the official data indicate. The official reported data show a decline of 1.4 percentage points in the unemployment rate; the actual decline that the BLS indicates occurred is more than twice as large as the official data shows.
Based on the data released, my calculations indicate approximately 7.7 million furloughed workers were “mistakenly” treated as employed in April but should have been treated as unemployed. Instead of the 18.1 million reported in Table A-11 of the Employment Situation for April, the correct number was about 25.8 million. In May, the Table A-11 shows a 15.3 million on-furloughed reduction in the overall number unemployed. Using the revised data based on the footnote to the BLS report, it now appears that the decline in unemployment in May due to falling numbers of unemployed workers on temporary layoffs was 5.7 million workers instead of the officially reported 2.7 million. This larger return of furloughed workers to employment again accounted for more than all of the approximately 5.0 million increase in overall employment implied by the footnote. Five million more workers returning to work in May is dramatically more than the continuing decline expected a week ago by others or even the 2.1 million official gain reported on Friday. That is not good news; it is great news.
What about the decline in employment expected by nearly all analysts and the press? Buried in all these numbers is a decline in employment for workers who were not on furlough that was swamped by the return of formerly furloughed workers. In the official data, the reduction of unemployed and furloughed workers was 2.7 million, but the reduction in the unemployed was 2.1 million. The difference is others who were not furloughed but added to the number unemployed. When the corrected measures are used, furloughed workers declined by 5.7 million, larger by about 0.7 million than the overall approximate number of 5 million reduction in overall unemployment (different from official measures due to rounding error). So there was a decline in employment in May that was overwhelmed by the return of furloughed workers observed in April and back in employment by May.
Where do we go from here? Depends on to whom “we” refers. The BLS official view is not to tamper with suspected errors in the collected surveys. So, whether BLS will adjust the official data in the future remains to be seen. But where the economy goes is more certain. Given the opening of states’ economies in late May and early June, the accelerating opening of businesses suggests even larger increases in employment and declines in the unemployment rate in June and the rest of the summer.
READER COMMENTS
Alan Goldhammer
Jun 8 2020 at 12:12pm
I’m not so sure how robust this is going to be. A lot of offices now have experience with remote working and will be very slow to bring everyone back. I know of one major investment firm that is not looking to reopen their office until early July and even then, it will be closed to all outside visits. A lot of restaurants that rely on business trade are not going to see it.
Office REITs are going to tell a very disturbing story going forward as the need for such space slowly goes away. I’m still unsure about the rebound of the airline industry. Several major carriers have cancelled routes to smaller cities and that trend is likely to continue as they cut costs.
I found this NY Times survey of epidemiologists interesting and in line with my own thinking. At what point to those over the age of 65 decide to travel again? At what point do we have children who live on the other side of the country fly home for a short visit (there is no way to do a quarantine if the visit is only for five days)? How is the visit managed in the home? These are questions my wife and I are wrestling with right now. There are no easy answers as we are in the middle of the Rumsfeld Paradigm Pandemic.
robc
Jun 8 2020 at 12:44pm
I think you are right about Office REITs, but that was going to happen anyway, the pandemic just escalated the timetable up about 5 years.
P Burgos
Jun 8 2020 at 12:51pm
That acceleration I think actually makes a difference, as 5 years is a lot more time to make adjustments than 5 months.
robc
Jun 8 2020 at 12:46pm
I am planning a trip in August to see my 70s and 80s aged parents. But, we are going to drive 10 hours despite dirt cheap flights available because we want to be able to push off the date and/or cancel as needed.
My mom started self-isolating her and my dad in mid-Feb, well ahead of the curve. I thought she was being paranoid at the time, but she got it exactly right. So I will only visit when she is comfortable with me visiting.
TMC
Jun 8 2020 at 4:24pm
Remote workers are still employed.
Thomas Hutcheson
Jun 9 2020 at 8:58am
Contingent on Fed policy. So far they have not brought inflation expectations back up to pre pandemic levels.
ricky
Jun 10 2020 at 2:48am
Most of the businessmen I have plans to pack up. The Marxist movement has created a toxic environment for entrepreneurship and investment. The push for equality of outcome over meritocracy is a dangerous proposition. The meaning of words are changing, and the demands to curtail what people can say – either through law, or through social justice warriors, (e.g., fear of public shame for having opposing views) has taken an incredible toll. I’m in the process of my moving my factory across the border. Most others will soon follow. I suspect the DJIA will drop at least 10-15% in the next few months. If Biden wins, the movement of assets will intensify. Country is actually on the verge of collapse. This is just the eye of the storm. Don’t expect the rally to last.
David Henderson
Jun 10 2020 at 4:20pm
ricky,
Your comments would be more valuable if you actually commented on the issues at hand.
Robert EV
Jun 10 2020 at 8:30pm
Marxism is tiny as heck in the US.
No one is pushing for equality of outcome; people are pushing for equality of opportunity (in the vein of the Fox and the Stork). If you believe said equality of opportunity exists you haven’t been paying any attention your entire life.
The meaning of words always change. “Kid” used to be a term of endearment between lovers that has been verboten for decades. Yeah, it takes some adjustment, but people (on the left and the right) tend to be accepting of mistakes.
Social mobbing over speech is very bad today, but not nearly as bad as it was in the south in the Jim Crow era. Did you hear of Trump’s campaign sending a cease and desist letter to CNN over their publishing of poll results that are negative for Trump?
Don’t let the door hit you on the way out. Someone else will likely use your vacated factory space.
Roger Fox
Jun 11 2020 at 5:56am
Thanks for the professional analysis. Unfortunately, the number of unemployed is growing, and another question is worrying. A recession in the economy is certainly a driver of technological and organizational change. The current situation will push companies from various industries to rethink the role of AI in business development, which will lead to an increase in the number of new projects in this direction.
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