October Jobs Report: Reality vs. Politics

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Today's October jobs report from the U.S. Bureau of Labor Statistics (BLS) – the last before next Tuesday's presidential election – has something for each of the major party candidates.

The BLS report showed a net increase of 171,000 jobs, beating the average analyst estimate of 125,000 and exceeding the net increase of 148,000 jobs seen in September.

The unemployment rate increased to 7.9% from 7.8% in September as more people returned to the labor market.

Given the tight race for the presidency, there is likely to be a lot of partisan chatter on the results of the October jobs report. The data may even sway some undecided voters to lean one way or the other.

The unexpectedly large number of net new jobs created will certainly be cited by U.S. President Barack Obama as proof that his policies are working and that he should be re-elected.

The uptick in the unemployment rate to 7.9%, just above the 7.8% level where it was when President Obama took office in January 2009, will surely be cited by Republican candidate Mitt Romney as evidence of President Obama's failure to revive the economy.

But before you let these numbers influence your political decisions, here are some often overlooked truths behind the jobs report.

The Reality of the October Jobs Report…

The reality of the BLS monthly jobs report is that it is an estimate. And that estimate gets revised-sometimes dramatically-as new data comes in over time.

In fact, often the U.S. jobs report underestimates job creation.

This can be seen by looking at the revisions to the August and September net new jobs data that were released along with today's initial estimate for October. The BLS press release states, "The change in total nonfarm payroll employment for August was revised from +142,000 to +192,000, and the change for September was revised from +114,000 to +148,000."

That's why the ADP report, which is based on real-time payroll data from the companies that use their payroll services, is often far off of the BLS numbers, which provide an initial estimate. The ADP jobs report is aimed at forecasting the final unemployment numbers, not the initial figures released today, as pointed out by NewArc Investments CEO Jeffrey Miller.

That means that while the ADP figures are an important part of many analysts' forecasts for the initial unemployment report, there can be a wide discrepancy between the ADP report and the initial BLS estimate.

Many commentators and the markets often ignore the sampling error that is inherent in the BLS survey.

Miller writes, "The payroll number has a confidence interval of +/- 105K jobs. The household survey is +/- 450K jobs. We take small deviations from expectations too seriously — far too seriously."

In other words, no matter how sophisticated your methodology, there are always errors inherent in any statistical sample. If the sampling error is +/- 105,000 jobs out of an estimate of 171,000, we are really talking about a range of +66,000 to +276,000 net new jobs created in October.

…And the Politics of the Jobs Report

If the BLS had announced a number at the bottom of that range, Mitt Romney would be our next president.

If the BLS had announced a number at the top of the range, President Obama would be setting the agenda for his second term.

By the time all of the data is in and the BLS announces the final jobs number for October sometime next spring, the winner of Tuesday's election will have been in office for about four months.

Let's face it. The average American voter doesn't understand that the monthly jobs report is an estimate that is subject to significant revision as more data becomes available. In an ideal world, the monthly jobs report would be viewed as simply one data point among many.

At the end of the day, the report isn't the knockout blow the Democrats were hoping for or the proof of incompetence that the Republicans had sought.

But the fact that the October jobs report could move markets and might even sway presidential elections is downright scary.

Worried there's a conspiracy behind the U.S. jobs report? Check out this commentary from our investing strategist Shah Gilani.

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