Source: Wall Street See

Announced this FridayUSA's non-farm payroll growth in SeptemberThe data initially looks very strong, with 0.254 million new non-farm jobs in September, the largest monthly increase in half a year, 69.3% higher than the expected increase of 0.15 million by economists. However, a detailed analysis of the data reveals that this sharp increase is largely due to the increase in government positions and seasonal adjustments in the United States.

Why the adjustment? In theory, when compiling employment reports, the Bureau of Labor Statistics (BLS) of the US Department of Labor adjusts the collected raw data to better account for seasonal factors, such as summer fluctuations in teacher vacations, booming construction industry, and increased hiring in dining establishments, making monthly comparisons easier.

However, the extent of seasonal adjustment in September this year broke a record. Bloomberg reported that if the seasonally adjusted employment population is divided by the unadjusted population, the result is 1.0. This is the largest seasonal adjustment value since the record in September 2002.

Economist Derek Holt from Scotiabank of Canada stated in a report that in recent years, September has consistently seen historically significant seasonal adjustments, indicating that we are in a different era where the BLS has changed the way it adjusts employment data for seasonality. This means we should focus on the reported employment growth and smooth the data over time.

Stephen Stanley, Chief USA Economist of Santander Capital Markets, a subsidiary of Spain's Banco Santander, stated that the growth in September's non-farm employment was mainly driven by the dining, construction, and retail trade industries, and the strong growth in these industries 'indicates that certain favorable tailwinds from weather and/or seasonal factors are unlikely to persist.'

Chris Low, Chief Economist of FHN Financial, pointed out in his report that September was a challenging month for the BLS, as there would be significant changes in the composition of the workforce between late summer and early autumn. 'Any seasonal distortions in this report represent an overcompensation for previous counter-seasonal distortions in the months prior, so it can be concluded that either this report is strong, or the previous reports were not as weak as previously thought. In any case, stronger than expected is an accurate description.'

Furthermore, the financial blog Zerohedge believes that the growth in government positions is also a major factor. Considering the return of teachers to schools, the number of government employees in September, unadjusted for seasonality, usually increases significantly, a trend that the BLS typically smooths out through seasonal adjustments. However, this was not the case in September this year.

As shown in the chart below, historically, regardless of whether the unadjusted numbers are high or low, the adjusted numbers for September have always shown relatively modest growth. However, in September this year, the unadjusted number of government workers surged by 1.322 million, resulting in a record high number of government workers after adjustment for September.

After seasonal adjustments, government employment recorded in the household survey for September skyrocketed by 0.785 million, the largest monthly increase in government workers on record, excluding the outlier in June 2020 caused by the COVID-19 outbreak.

Although there was a sharp increase in government workers in September, private sector workers only increased by 0.133 million, which may be a more reliable figure. However, it indicates that the recent weakness in the labor market continues.

Not only the household survey, but institutional survey data also shows a significant increase in government employment: the unadjusted number of government workers increased by 0.918 million, while the unadjusted number of private sector workers decreased by 0.458 million.

Why the significant increase in government employment? Zerohedge believes that it is to bring the unemployment rate down to 4.1% rather than rise to 4.5%, as triggering the economic recession-predicting 'Samrule' would be detrimental. Additionally, it is to prevent a market collapse. After all, this is crucial data released just a month before the US presidential election. BLS's motive is quite clear – to increase 'government positions' as much as possible, not only to maintain continuous labor force growth but also to further reduce the unemployment rate.

In addition to seasonal adjustments, some analysts believe that the unusually strong performance of this non-farm employment report is also influenced by the response rate of an important component in the report - the Establishment Survey. The establishment survey in the report mainly focuses on surveys of employment data from businesses and government agencies, while the Household Survey collects employment information through surveys of individual household members.

In the establishment survey sample of the September report, only 62.2% of businesses submitted responses on time during the initial estimation, marking the lowest proportion since September of any year since 2002. Looking at two subsequent surveys over a period of time, the response rate of the survey is usually close to around 95%, so the revised data may experience significant fluctuations.

Samuel Tombs, Chief US Economist at Pantheon Macroeconomics, believes that the alarm bells have been sounded by the extremely low response rate in the employment survey. The response rate from small businesses is too low, and the extent of job cuts at small businesses exceeds that of large enterprises. Therefore, it is expected that the September employment data to be released in the coming months will be significantly revised downwards.

Editor / jayden