Faulty analysis can lead to wildly incorrect conclusions, which can lead to bad decisions.
Today, the US Bureau of Labor and Statistics published their report on the employment data through the end of January, 2012, showing a huge increase in private payrolls (a gain of 257,000 according to the BLS, almost 100,000 more than economists were predicting).
For a variety of reasons, there has been no shortage of pundits in the media predicting economic doom and a double-dip recession in the past year -- in fact, since the economic recovery began in March of 2009. We have been on record as arguing that this pessimism is overblown, and that investors should be careful not to make bad decisions based upon such "sky is falling" analysis -- see for example this post published in June of last year entitled, "Do we have a 'dead economy walking?'"
With this latest positive jobs report, the pundits from the "sky is falling" school have arrived right on cue to declare that the employment situation is not really improving at all, and that the unemployment rate is only falling because "unprecedented" numbers of people "dropped out of the labor force" in January (see for example this article linked on the front page of the Drudge Report today in the center column near the top of the page).
Another article entitled "Employment Report: Blatant and Outrageous Lies" declares that the employment report is "intentionally fraudulent" for the same reason as the article from the Drudge page, saying that "0.6% of the entire labor force [. . .] departed the working population in one month, three times the alleged drop in the unemployment rate."
However, economist Brian Wesbury shows that these arguments are simply wrong, the product of bad analysis. In this essay on today's numbers, Mr. Wesbury explains that "the labor force actually increased in January from its December level." Noting the bad analysis in the article linked on Drudge, he says:
Mr. Wesbury has done investors a tremendous service in spotting this faulty analysis and explaining why it is wrong.
Today, the US Bureau of Labor and Statistics published their report on the employment data through the end of January, 2012, showing a huge increase in private payrolls (a gain of 257,000 according to the BLS, almost 100,000 more than economists were predicting).
For a variety of reasons, there has been no shortage of pundits in the media predicting economic doom and a double-dip recession in the past year -- in fact, since the economic recovery began in March of 2009. We have been on record as arguing that this pessimism is overblown, and that investors should be careful not to make bad decisions based upon such "sky is falling" analysis -- see for example this post published in June of last year entitled, "Do we have a 'dead economy walking?'"
With this latest positive jobs report, the pundits from the "sky is falling" school have arrived right on cue to declare that the employment situation is not really improving at all, and that the unemployment rate is only falling because "unprecedented" numbers of people "dropped out of the labor force" in January (see for example this article linked on the front page of the Drudge Report today in the center column near the top of the page).
Another article entitled "Employment Report: Blatant and Outrageous Lies" declares that the employment report is "intentionally fraudulent" for the same reason as the article from the Drudge page, saying that "0.6% of the entire labor force [. . .] departed the working population in one month, three times the alleged drop in the unemployment rate."
However, economist Brian Wesbury shows that these arguments are simply wrong, the product of bad analysis. In this essay on today's numbers, Mr. Wesbury explains that "the labor force actually increased in January from its December level." Noting the bad analysis in the article linked on Drudge, he says:
The reason Tyler and Drudge are confused about this is because they are looking at a statistic that measures the number of people of working age who are “not in the labor force.” This number did jump by 1.2 million in January. However, any analyst should look deeper into the data before making outrageous claims. [. . .]However, as economist Wesbury tells us, when the BLS adds a catch-up statistic of this sort, it estimates how many of the newly-added headcount consists of people who are employed and how many are not:
Every once in a while the Bureau of Labor Statistics (BLS) makes catch-up adjustments to its underlying data. Often, but not always, this happens in January. This time the BLS added 1.7 million people to its estimate of the working age population.
For the month of January, the BLS said that of the 1.7 million new people it counted, 500,000 were in the labor force and 1.2 million were not. To say, as Drudge and Tyler Durden did, that the labor force fell by 1.2 million is a basic and frightening misuse of statistics. It’s simply not true and it is leading many people astray.Investors who listen to the analysis in the media should be very aware of the possibility of bad analysis, especially when there are underlying assumptions which might cause pressure to conform data into a preconceived narrative (in this case, a narrative that the economy cannot possibly be improving).
Mr. Wesbury has done investors a tremendous service in spotting this faulty analysis and explaining why it is wrong.
