We have discovered a likely source of error in our employment model that would help explain some of the big differences between our jobs estimates based on withholding taxes and the jobs estimate from the BLS and ADP.
Recall that the BLS reported that the U.S. economy created a surprising 243,000 jobs in January. In addition, ADP reported 170,000 new jobs. Both of these estimates are far higher than our January jobs estimate of only 45,000.
We have discovered that a year ago a calendar quirk related to the implementation of the payroll tax reduction artificially depressed our estimate for growth in wages and salaries. This quirk will also impact February estimates as well.
According to our sources, the payroll tax cut was supposed to be fully implemented by January 31, 2011. While most companies made the adjustments to their tax withholding tables before the deadline, some did not and had to implement catch-up withholding tax adjustments in February.
So how does this quirk impact our jobs estimates? It would have inflated withholding tax collections in January 2011 and deflated tax collections in February 2011. That means our estimates for wages and salaries and employment for January 2012 would also be depressed. Our preliminary estimate is that the distortion is equal to about 2% of withholdings in January 2011. When we make the adjustment in the January 2012 data, growth in wages and salaries increases to 2.9% y-o-y rather than our original estimate of 0.9% y-o-y. Also, employment growth was probably closer to 100,000 to 135,000 jobs, not 45,000 jobs as we previously estimated.
Our revised estimate is still lower than both ADPs and the BLS. However, we believe their estimates are too high due to huge January seasonal adjustment factors. How did the BLS do with its estimates the previous two Januaries? This past January, BLS revisions took its January 2010 estimate up 100% and its January 2011 estimate up 206%. Clearly, the BLS, which is the supposed standard bearer for employment estimates is not without its challenges either.
So whats the bottom line. We believe employment growth is positive but modest and not enough to absorb new entrants into the workforce or bring down the unemployment rate anytime soon.
Madeline Schnapp
Director of Macroeconomic Research
TrimTabs Investment Research
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