V is for Victory

Okay, I was wrong.

As the economy began to tumble under the weight of a government-mandated shutdown that crushed the service, leisure and manufacturing industries, I began attempting to educate. My intent was to counter the misreporting of employment data by the "news" media, whether due to their reporters' ignorance of economics, or an intentional effort to frame a narrative. And as part of that education effort, I made a few forecasts.

And I'm happy to report that I blew it (the forecasts; hopefully not the education effort).

I began by explaining what initial jobless claims are, and that you can't aggregate them over several weeks to come up with total unemployed. This is because some people file an initial claim this week, then find work again within one or more weeks.

Case in point: after the June 4 release of initial claims for the week ended May 30 showed that less than 1.9 million Americans had filed initial claims that week, most in the media were saying that the total number of unemployed was over 42 million, which was the cumulative number of first-time filings since the week ended March 21. (The media conveniently ignored the fact that initial filings peaked at the end of March, have been declining sharply ever since, and that the 1.9 million number was the lowest since the shutdown began.)

Before we unveil the actual number of unemployed, let's continue re-tracing our educational path. I next differentiated between initial claims and continued claims. The latter is the total number of people collecting unemployment insurance. It includes both first-time and ongoing filers. Both initial and continued claims have peaked, which I predicted would happen fairly quickly. We also discussed numbers like the civilian labor force, the unemployment rate, and non-farm payroll growth. I predicted that the unemployment rate would peak in May at around 24-25% before beginning to decline. And while I didn't state it, I expected non-farm payroll growth to resume in June, after a few months of shedding jobs due to the shutdown.

This morning (June 5), the employment report for May was released by the Bureau of Labor Statistics (BLS). This bellwether report includes the unemployment rate, non-farm payroll growth, average hourly earnings, and other key employment metrics.

The May report proved me wrong. Even I was surprised by the velocity of improvement in the labor market. To be sure, these numbers still aren't good. But they're considerably better than they were, and have reversed course faster than any economist expected (and certainly faster than the media wanted you to believe). Let's examine them.

Non-farm payrolls grew by 2.5 million jobs. The forecast was a decline of 8.5 million. That 2.5 million was a record - like more than two times the previous record.

The unemployment rate in April was 14.7%, and all forecasts pointed to the May number topping 20% - mine included. The actual number was 13.3%, meaning fewer Americans were unemployed in May than in April. That's a good thing, and it was unexpected.

Average hourly earnings ticked down, from $30.04/hour to $29.75/hour. This is actually a good thing. Why, you ask? Well, earnings jumped by the largest amount ever from March to April, rising from $28.69/hour to $30.04. That was because the government shutdown eliminated huge numbers of low-paying jobs (you may recall that I also wrote about this being a bottom-up vs. a top-down recession, and how that boded well for recovery). In other words, the bottom end of the distribution of wages in the economy was decimated, so that the entire distribution shifted higher, and took the average up with it. So as those jobs are returning, the lower end of the distribution will be re-filled, if you will, and the entire distribution will normalize.

Finally, the total number of unemployed was about 20.9 million, down from 23 million in April. Had the forecast for the unemployment rate borne out, that number would have been well north of 30 million.

So I was wrong. Even I didn't expect the numbers to improve that much, that soon. But hey, I'm in good company: the media were wrong, too, in stating that total unemployment was more than 42 million. I was a lot closer than they were, but then, I wasn't trying to mislead anyone, and unlike the media, I was looking at the numbers based on what they really mean.