Found! 1 million jobs

NEW YORK (CNNMoney.com) -- The question of why the economy hasn't added more jobs since the 2001 recession ended may get this answer Friday morning: It probably did.

The government's January employment report is due before U.S. financial markets open Friday, and economists are forecasting 150,000 new jobs were created last month, down a bit from 167,000 in December. The unemployment rate is pegged to hold steady at 4.5 percent.

But the numbers will also include the Labor Department's so-called benchmark revisions to job numbers for April 2005 through March 2006. While it's gotten very little attention, the department's Bureau of Labor Statistics (BLS) estimated last October that the revisions will add about 810,000 jobs to its count of U.S. payrolls for that 12-month period.

In addition, the BLS will make changes to its estimates for April 2006 through December 2006, and some economists say several hundred thousand additional jobs may be counted for that period, meaning the overall job gain could top 1 million. Wachovia senior economist Mark Vitner estimates a total net gain of 1.2 million from all the revisions.

Changes of that magnitude would obviously dwarf the January numbers, which will nevertheless get most of the attention on Wall Street.

The benchmark revision is the biggest going back to the 1970s, and some economists say it shows not only that the economy is doing much better than previously believed, but that the way the Labor Department calculates those on the job needs significant revisions.

If the revision for the 12 -months ending in March 2006 does produce the now expected upward revision of 810,000, that will mean that job growth in the period was about 40 percent stronger than the government's previous estimates.

"It looks as if the monthly numbers grossly undercounted the true number of jobs created," said Bernard Baumohl, managing director of the Economic Outlook Group, a Princeton, N.J. research firm.

It's not that the benchmark always revises the number of workers higher. In fact in four of the previous five revisions, the benchmark revision actually lowered the previous payroll count.

The benchmark revision is made using much harder information than used to compile the monthly report, which is based upon a survey of employers across the nation. The BLS economists will now be able to look at things such as unemployment taxes paid by employers for the April 2005 through March 2006 period.

That includes the period after Hurricane Katrina, when government number crunchers had trouble contacting employers in the Gulf Coast region. It tried to make allowances for those difficulties, but part of the large revision could be due to the peculiar problems associated with those events.

But Baumohl and other economists say the big revisions to be announced Friday signal that the way the BLS has been compiling the number used by everyone from the Federal Reserve to corporate America when making judgments about economic strength needs to be changed going forward.

"It's very hard to capture all the employment that takes place at small companies and new businesses," said Wachovia's Vitner. "The BLS tries to incorporate new business start-ups, but the economy is always changing. For example, young people are much more likely to go out and start a new business today than they were in the past."

The BLS will only say that it's not planning any major changes in the way it estimates payrolls, but that it will discuss changes that will take place in the future estimates when it releases the revision on Friday.

There have been other estimates that showed much stronger job growth than the BLS employer survey. A survey of households, also conducted by the BLS and used to calculate the unemployment rate, showed a 3.1 million gain in jobs for the 12 months ending in March 2006, compared to the 2 million job gain recorded in the department's payroll survey of employers.

Economists widely consider the payroll survey to be significantly more accurate of the two readings. But Baumohl and other economists say it's not accurate enough to justify the attention paid to the monthly net change in payrolls.

"The BLS says that the payroll estimate has a margin of error of 150,000 jobs, while the household survey is plus or minus 300,000 jobs," he said. "So when you see a gain of 150,000 in the payroll number, it could be zero, or 300,000. It's tough to draw any conclusions about the state of the economy from that."

Vitner said that part of the problem is that the survey is very accurate when compared to the overall number of jobs it's counting, which was 136.2 million in December. But all the attention is given to the much smaller net change in jobs.

Both agree that the BLS should be given more resources to refine and improve the accuracy of the payroll estimates.

"I know virtually all the agencies in Labor and Commerce have been pleading for more money. I can't quantify what they need," said Baumohl. "But for business managers it's problematic to make decisions based on their best guess on what's going on in the economy."

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