April 22, 2008

Benchmarking Update
On March 6, the Texas Workforce Commission (TWC) released its annual revision to its Texas payroll employment estimates. The new data incorporate information from the broader (but delayed) Covered Employment and Wages (CEW) survey into the payroll data. This process, known as benchmarking, improves the accuracy of the payroll employment figures. With the March 6 release of January 2008 employment data, the effective benchmark was updated from September 2006 to September 2007. As a matter of policy, TWC does this once per year. However, the CEW data are published quarterly. For several years FRB Dallas has been calculating and reporting "early" benchmarks to the Texas payroll data, which incorporate CEW data as they are published quarterly.

Chart 1 depicts Texas’ total payroll employment as reported by TWC as of the end of 2007 (prior to their annual revision) and as reported by FRB Dallas. Our early benchmark at that time incorporated CEW data through the second quarter of 2007. TWC had estimated 2.1 percent employment growth from December 2006 to December 2007; our estimate was 3.1 percent. Chart 2 adds TWC’s revised data, which increases the employment growth estimate to 2.5 percent.

Chart 1

Chart 2

It might appear that our early benchmark significantly overstated employment growth. This is not the case, however. In the process of calculating its annual revision, TWC used CEW estimates for the first three quarters of 2007 that predate estimates available now—in fact, they predate the CEW estimates on which our year-end 2007 early benchmark was based. In keeping with our procedures, we have used the most up-to-date CEW data in our estimates. Chart 3 adds the result of that revision.

Chart 3

Our new estimate shows 2.9 percent employment growth, slightly less than our year-end 2007 version, but still higher than the official TWC estimate. If that were the end of the story, our early benchmarking effort would be a worthy contribution toward understanding the Texas economy. In fact, however, there is more to be said.

Chart 4 repeats the above exercise for private employment—that is, government jobs are excluded. It can be seen that our year-end 2007 version of the data is practically the same as our new one, indicating simply that the CEW data for private industries were hardly changed by the introduction of third-quarter data.

Chart 4

Chart 5 helps explain the different results for total and private employment. It shows TWC's seasonally adjusted total government employment as it was reported before and after the annual revision. The unbenchmarked data did not reflect the severe downturn in August and September, which was apparently captured in the third quarter 2007 CEW data. At this time, the reason for the drastic revision is unclear. We do know it has to do with the sector known as local government employment services—teachers, primarily. A state-mandated change in the school year and an increasing number of teachers choosing year-long instead of nine-month contracts would complicate performing accurate seasonal adjustments.

Chart 5

Because of this uncertainty about the true pattern of government employment, let’s focus on private employment. After six consecutive quarterly upward revisions, averaging 1.7 percentage points, private employment growth was unrevised in third quarter 2007. There is some reason to believe that the pattern of upward revision seen during expansions may be reversed during contractions. Other evidence suggests a weakening Texas economy; if it slows sufficiently, we may yet see downward revisions to the initial payroll growth estimates. Even if the Texas economy doesn’t enter a period of actual contraction, it may not be reasonable to expect the kind of upward revisions we have seen in recent years—at least not until we re-enter a period of expansion.

Post-Benchmark Employment Growth
According to our FRB Dallas estimates, private employment growth rebounded from an annualized 2 percent in the third quarter to 3.1 percent in the fourth quarter. The weakening state economy, however, suggests the possibility that the fourth quarter figure could be revised downward. We are not predicting this, but it is possible. The preliminary estimate for private payroll growth in first quarter 2008 slowed to an annualized rate 1.8 percent, and the same caveat about potential revision applies.

—Franklin D. Berger