Government statistics don’t pass the ‘sniff test’

Have you ever gone to the refrig­er­a­tor, opened it up, and been hit in the face with an odor that tells you some­thing in the fridge is not quite right? Well, that is pre­cisely what is hap­pen­ing right now with the government’s cur­rent crop of eco­nomic sta­tis­tics. Some­thing stinks. The prob­lem is that it is some­times extremely dif­fi­cult to tell what the smelly cul­prit is, and if a wrong guess is made, the health-related con­se­quences could be sig­nif­i­cant, much like try­ing to digest a rot­ten piece of food.

Over the past few months, the usual eco­nomic data have been released and var­i­ous data ele­ments sug­gest a very dif­fer­ent nature to our nation’s eco­nomic growth path.

The data releases that tend to get the most atten­tion, the employment/unemployment fig­ures, seem to point to a strength­en­ing busi­ness sec­tor. For the past three reported months — from Decem­ber of last year through Feb­ru­ary of this year — the aver­age num­ber of pay­roll jobs cre­ated exceeded 240,000. At the same time the unem­ploy­ment rate has tracked down­ward, falling from 8.5 per­cent to 8.3 per­cent. All-in-all, these num­bers would seem to sug­gest the much-anticipated turn­around in labor mar­kets has arrived and its clear sail­ing ahead.

But then there are other data series flash­ing red lights and warn­ing that the near-term out­look is any­thing but rosy. Most par­tic­u­larly, recent data related to past, present, and future eco­nomic growth may be problematic.

Con­sumer spend­ing, which accounts for over 70 per­cent of eco­nomic activ­ity has been flat for the past three reported months, and this despite strong retail sales data which seem to sug­gest the con­sumer sec­tor is pick­ing up steam. In part this dif­fer­ence may be due to the real­iza­tion that retail sales make up less than half of all con­sumer spend­ing, with spend­ing on “ser­vices” some­times weak even as retail sales are strong.

But even with this dis­tinc­tion, how can a flat-lined con­sumer sec­tor pro­duce so many new jobs? Well, per­haps the jobs being cre­ated are not all that great in terms of the income they pro­duce, which then facil­i­tate only mediocre con­sumer spend­ing. On this mat­ter, fig­ures are hard to come by, since the pay­roll data series do not pro­vide the needed data to break down the nature of jobs being cre­ated. For­tu­nately the other labor mar­ket series, the house­hold sur­vey, does dis­tin­guish between full time (work­ing at least 35 hours per week) and part time workers.

Over the one-year time frame from Feb­ru­ary 2011 through Feb­ru­ary 2012 total employ­ment expanded by 1.8 per­cent. When bro­ken down by full time ver­sus part time, the lat­ter grew much more quickly, with a year-over-year growth rate of 2.6 per­cent (com­pared to 1.7 per­cent for full time). But then — it seems like there is always a “but then” when deal­ing with econ­o­mists — the aver­age num­ber of hours worked (by all work­ers) rose by 0.6 per­cent over that same one year, so aver­age weekly earn­ings are not as adversely impacted as the part-time employ­ment num­bers alone suggest.

Which then brings the analy­sis to fig­ures on total per­sonal income, which are par­tially derived from the wages received from work­place efforts. Over the one year period from Jan­u­ary 2011 through Jan­u­ary 2012, per­sonal income from all sources rose by a mod­est 3.6 per­cent. Far more robust was the growth rate from wage and salary income, up by 5.0 per­cent. So, per­haps it is this work-related income which really counts in terms of con­sumer spend­ing. But then, why isn’t con­sumer spend­ing stronger, par­tic­u­larly given that the sav­ings rate has fallen over the past year (from 5.2 to 4.6 percent)?

One pos­si­ble expla­na­tion could be that other sources of income — such as from gov­ern­ment trans­fer pay­ments like unem­ploy­ment com­pen­sa­tion — have par­tially off­set the higher earned income. Data would seem to sug­gest this is true, with trans­fer pay­ments ris­ing by a very slim 0.2 per­cent over the most recent one-year period.

But then if this is true and gov­ern­ment is back­ing off as a source of income (either before or after taxes), how can the level of total con­sumer spend­ing hold up as time pro­gresses? And won’t this even­tu­ally cause busi­ness hir­ing to stall out, as pro­duc­tion and employ­ment needs stag­nate along with con­sumer spending?

In the final analy­sis, some­thing about the present eco­nomic data is sim­ply not pass­ing the sniff-test. The prob­lem is, ana­lysts don’t know where the stench is orig­i­nat­ing and guess­ing wrong may lead to a very sick future busi­ness environment.

Dr. James New­ton serves as chief eco­nomic advi­sor to Com­merce National Bank and is an aux­il­iary fac­ulty mem­ber in eco­nom­ics and sta­tis­tics at OSU-Marion and OSU-Newark. Dr. Newton’s views do not nec­es­sar­ily reflect those of Com­merce National Bank or OSU-Marion/Newark.

Posted by Jim Newton on Mar 21 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.