Jack Welch’s Gaffe – A Follow-up

Jack Welch’s Gaffe – A Follow-up
David R. Kotok
October 19, 2012


We thank the many, many readers who sent comments on our missive about Jack Welch’s Gaffe. See www.cumber.com for the original commentary on Welch.

On October 5, the Bureau of Labor Statistics (BLS) published the report “Employment from the BLS household and payroll surveys: summary of recent trends.” Here is the link: http://www.bls.gov/web/empsit/ces_cps_trends.pdf. We recommend it to anyone seriously interested in the methodology behind the BLS activity. Readers may then judge for themselves whether Jack Welch and others of his ilk are correct with their innuendos that the BLS statistics may be cooked. I employ the word may because Welch has now introduced a “question mark” at the end of his infamous tweet.

Three readers used offensive language, called me a liar, and defended Welch as the only deity of truth around. They have been removed from our listserve. We do not run a blog where wannabe analysts can use four-letter-laced epithets and hide behind anonymity. That sport is for others.

We do offer our direct views about issues and markets. We invite both disagreement and concurrence. We admit errors and post errata. Our purpose is to add to the serious discussion of topical issues while also communicating with our clients, their consulting advisers, our media friends, and the general public.

Enough digression; let’s go back to the Welch piece.

Among the 35 economists and financial professionals who replied to us, agreement with our criticism of Mr. Welch was nearly universal. Several respondents were on data or statistical committees of economic organizations such as NABE (www.nabe.com). Some had personal working experience in government statistical agencies. They served Republican and Democrat administrations. Not one supported Welch’s allegations.

Several skilled professionals noted supporting and corroborating data from sources other than BLS. That info indicated that the statistical improvement in the recent employment report may be valid.

One thoughtful response came from Madeline Schnapp. She is one very smart and hard-working lady, who is also the Director, Macroeconomic Research at TrimTabs Investment Research. Madeline sent the following comments:

“BTW, to add to the confusion, our withholding tax based employment estimate was 210,000 in September vs. 114,000 from the BLS. So according to our data, there is acceleration in growth. We just do not think it is as much as currently reported by the BLS and possibly reported by the BEA come October 26th. The BLS revised August employment up 48% to 142,000 vs. our 185,000. As we have been saying since July, we think the driver is housing, based on current data and input from our stable of real estate data experts. Friday’s reports from JPM and WFC seem to support our earlier conclusion.

“As is usually the case, when we generate an employment number that is unexpected I spend a great deal of time trying to throw water on the estimate. This month, I did come up with another possible explanation for non-wage, non-job withholding tax growth: re-characterization of wage income from non-taxable to taxable (eg. 401ks). I chatted with some defense industry analysts this past week and they are of the opinion that major defense contractors are already planning for an 8% budget cut. So perhaps, in anticipation of layoffs after the first of the year, employees, en masse, are canceling their 401K contributions in anticipation of losing their jobs. But in order to reduce the employment nos. significantly, I estimate that approximately $150 billion in income (annualized) would have to be re-characterized, which seems like an awful lot and thus unlikely.

“So it would seem that thirty-year mortgage interest rates of 3.39%, and fifteen-year mortgage interest rates of 2.7% appear to be having the desired effect. In the past two weeks, however, the y-o-y growth in withholding taxes has retreated a bit. It is too early in the month to tell whether or not the retreat is noise, but if the growth driver is the housing sector, the seasonal nature of that sector might now also be responsible for a deceleration going forward.”

Thank you, Madeline. That is a helpful response and thought-provoking.

There were many Welch detractors who were not personally known to me. Here is an example from Malcolm B., who resides in NY.

“Welch certainly knows something about unemployment: at GE he unemployed over 100,000 men and women ‘in order to make to make GE more profitable’. I used to be impressed with his record. But, if he were really that good, he could have figured out something profitable to do with those people, who were good enough to be hired in the first place. Maybe he also knows something about cooking the books: it now seems just a bit fishy that almost every single quarter he just made estimates…”

Thank you, Malcolm. Many others hold similar views.

We will close this commentary on the Jack Welch affair with quotes from Gene Epstein of Barron’s. In the October 15 edition, he wrote:

“Former CEO of GE Jack Welch – fresh from his earlier charge of data manipulation and implicitly conceding that 7.8% isn‘t a terrible number – decided to weigh in again in an op-ed in Wall Street Journal. Anyone reading this piece should have stopped when the author observed, ‘by definition, fewer people in the workforce leads to better unemployment numbers,’ thus earning Mr. Welch an ‘F’ on both the definition and the facts. The facts are that fewer people in the workforce have not prevented worse unemployment numbers several times in the past few years. Martin Fridson, whose book Financial Statement Analysis is in its fourth edition, observes that ‘Jack Welch came by his suspicion of data-manipulation honestly, having presided over some aggressive tactics to smooth earnings fluctuations while CEO of GE.’”

Ok enough about Welch.

BTW, conspiracy theorists were dealt another blow when the weekly unemployment claims numbers were announced. The whole notion of a “fix” by California Democrats is just more bizarre behavior. Notice that the BLS discussed the seasonal shifts and that one state (CA?) had a one-week anomaly. Any basic statistics student knows that weekly claims are volatile and that a four-week moving average is a much better short-term indicator of labor market conditions and changes. The four-week average is on track, as it was during this whole Jack Welch, weekly claims, conspiracy-theory saga.



David R. Kotok, Chairman and Chief Investment Officer, Cumberland Advisors.

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