For much of the past year, as the economy has come back to life on most fronts, but the two most important measures of employment have gone in different directions.
By Martin Wolk
msnbc.com
updated 2/5/2004 4:59:02 PM ET 2004-02-05T21:59:02

Friday’s closely watched employment report could go a long way toward resolving a debate that has been simmering among economists and forecasters for months. Then again, it might not.

For much of the past year, as the economy has come back to life on most fronts, the two most important measures of employment have gone in different directions, frustrating analysts and making it hard to know exactly what is happening in the labor market.

Last month, several forecasters were expecting a milestone employment report that would put to rest concerns the economy is not truly firing on all cylinders. Instead the issue remained unresolved, with the government reporting that the economy added a barely measurable 1,000 jobs while the unemployment rate dropped to 5.7 from 5.9 percent.

This time around, some analysts again are expecting a big employment number, boosted in part by seasonal factors related to relatively weak retail hiring in the holiday season. On average analysts are expecting the government to report the economy added 125,000 jobs last month, which would be the best showing in a year but still barely enough to keep up with growth in the work force. But estimates are spread across a wide range of 90,000 to 300,000, according to Thomson Financial.

While job growth as measured by the payroll report has been minimal, other figures have indicated a sharp rebound in the job market. The payroll report, for example, shows the economy added only 221,000 jobs in the last half of 2003. But the monthly household survey, which is used to calculate the unemployment rate, indicated the economy added three times that many -- 664,000 jobs.

“I can't remember there being so many disparities among the employment statistics,” said Ethan Harris, chief U.S. economist of Lehman Bros. “Some of them we can understand, and some of them we can’t.”

There are basically two schools of thought on the issue. Labor Department statisticians insist that the payroll survey gives the most accurate view of the labor market from month to month, and most analysts say it offers a clear indication that job growth is far more sluggish than it has been in past recoveries.

But some analysts say there are reasons to believe the government’s household survey offers a more accurate picture of the labor market in this early stage of the expansion. They point out that claims for new unemployment benefits have dropped sharply in recent months, and business surveys have shown evidence for increased hiring. A survey by the Institute for Supply Management, for example, shows that non-manufacturing firms have expanded employment for four straight months.

"I always say the household survey has to be closer to the truth,” said William Dunkelberg, chief economist for the National Federation of Independent Business. He points out that the payroll survey is designed to ignore self-employed individuals, which may include companies just starting out in the initial phases of an expansion.

“Obviously the payroll survey misses new firm formation,” he said. “So there are a lot of pieces that get missed, and they are most often missed when the economy is moving in one way or another.”

But the household survey shows little correlation between self-employment and the business cycle. On average between 7 and 8 percent of Americans have described themselves as self-employed over the past decade, including about 7.5 percent currently.

Major Market Indices

And Patricia Getz, who manages the payroll survey as a division chief at the Bureau of Labor Statistics, said it is simply not true that the monthly report ignores the impact of small and new businesses.

“We sample businesses of all sizes,” she said. “There are small businesses in the sample. We can’t get them as quickly as they are created, but we account for them in the estimate. We don’t ignore either one of those things.”

In its latest policy statement, the Federal Reserve recognized the mixed evidence of job growth, saying, “Although new hiring remains subdued, other indicators suggest an improvement in the labor market.”

But Harris points out that mixed evidence is not what the Fed Chairman Alan Greenspan and his colleagues are looking for as they try to determine when to begin raising interest rates from their current historically low levels.

“Mixed isn’t what they want,” he said. “They want strong, because strong is what brings healing to the wounds of the past few years.”

And mixed evidence of growth is not what President Bush wants, either, as he prepares to defend his economic record in his re-election campaign.

But few analysts are expecting a return anytime soon to the job growth levels of the mid-1990s, when the economy routinely added 250,000 jobs or more a month.

“The job market is still soft,” said Mark Zandi, chief economist of Economy.com, a forecasting firm. “It should gather momentum, but I do think the revival will be tempered and the broader economic expansion will be tempered, as well.  I just don’t think the economy is going to come roaring back.”

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