Some things you should know about those unemployment numbers

The Bureau of Labor Statistics issued its monthly Employment Situation report this morning, and you've surely already seen the headlines about 524,000 in job losses and a 7.2% employment rate.  But I thought it would be helpful to go through the basics, as in times like these lots of people who normally ignore the employment report are suddenly obsessed with it. (For those of you who know far more about this stuff than I do, please feel to either move on or add your voluminous expertise in the comments.)

1. It's two different reports. The job loss number above and the employment rate come from two entirely different sources. The job loss is the reduction in nonfarm payroll employment reported by businesses in the Bureau of Labor Statistics' monthly establishment survey of 400,000 employers. The unemployment rate comes from the Census Bureau's monthly Current Population Survey of about 60,000 households. Given that there are far more households in the country than employers, it's clear that there's a lot more extrapolation involved in the second survey.

2. The unemployment rate is a deeply flawed measure. It's calculated by adding up the number of people who tell the Census Bureau that they're working and those who say they aren't working but have looked for work in the last four weeks, then dividing the latter by the sum. Obviously, this misses lots of people who'd like to have a job but have decided it's pointless to look. But this isn't a new flaw, and there are lots of other numbers available that together can give a more complete picture of the unemployment situation. (David Leonardt has the goods on this.) So it's not some kind of dread conspiracy, just a reason not to take the unemployment rate as the final word. Or the first one.

3. The unemployment rate is a lagging indicator. Because it only counts those who are looking for work, it tends to peak after a recession is over, when the economy is improving and those who had given up on finding jobs decide it's worth giving it another try. That's why the people who a month ago were saying, Hey, what's everybody all worked up about, the unemployment rate is only 6.5%, were blowing smoke.

4. So it's the payroll employment number you should pay attention to. It gives a much more timely, reliable picture of the speed and severity of a downturn than the unemployment rate does. Once the economy begins to recover, there are some issues. If lots of jobs are being created by new businesses not yet included in the establishment survey, they won't show up in the payroll number. At the point in the business cycle, it's also worth taking a look at the employment number from the household survey to see if it's performing substantially better. We're not at that point yet.

5. How bad is it? The headline everywhere this morning is that this was the Worst year for jobs since 1945, because the December-to-December job loss of 2.6 million was the biggest calendar year loss since 1945, when the country was demobilizing from World War II. But that's a misleading comparison, given that the population of the U.S. in 1945 was less than half what it is now. If you look at percentage job loss, 2008 was the worst year since 1982. Looking at calendar year losses is kind of misleading too, given that recessions usually aren't thoughtful enough to begin and end on New Year's Day, but you get the same result—worst since 1982—if you look at percentage job loss on a rolling 12-month basis. What really matters is job losses from the beginning to the end of the recession, but we don't know when this recession will end yet. Right now the pace of job losses is slightly worse than that at the worst of the 1981-1982 recession but still below that at the worst of the 1974-1975 recession. So while there are all sorts of reasons to believe that this will be the worst recession of the post-World War II era, the proof isn't there in the employment report just yet.

6. Any bright spots in the employment report? Not really. Every industry sector lost jobs except education, health care and government, and they barely added any. The closest thing to a positive was that there weren't any big downside surprises. The December job loss of 524,000 was about the what the economists who follow this stuff were expecting, and the November number was only revised modestly downward (from -533,000 to -584,000).