Party time!

Tomorrow morning, the Bureau of Labor Statistics will report May's monthly jobs report. This is a widely followed, highly anticipated report that can move the Dow Jones (INDEX: ^DJI) in a big way one direction or the other.

It's also one of the most abused and misinterpreted reports around. Here are three of the biggest whoppers I run into frequently.


Misconception No. 1: "Jobs numbers missed expectations."
March's jobs report showed the economy created 120,000 jobs. The average forecast was for 205,000 jobs. Not good, right? "Stocks decline as jobs report misses estimates," reported Bloomberg.

But statistically, that's not quite right. Every monthly jobs report has a margin of error of plus or minus 100,000, so there's no meaningful difference between 120,000 and 205,000.

Why so much wiggle room? The surveys used to calculate jobs reports don't actually count every person in America -- that would be too hard for anyone to do every month. Instead, they use small samples, and extrapolate the results of those samples out to reflect how many jobs were probably created and what the unemployment rate probably is. Since there's a risk the bureau might survey a group of people not reflective of the entire nation, that extrapolation can't be done with precise numbers; just broad ranges.

The BLS gives an example. When it reports that 50,000 jobs were created in a month, what it's really saying is that there's a 90% chance that the monthly change was between -50,000 and +150,000.

Likewise, the margin of error for the unemployment rate is 0.2%. So when it's reported that the unemployment rate is 8.1%, that basically means there's a 90% chance that it's between 7.9% and 8.3%.

Nearly everyone looks past this, so if the jobs report misses estimates by even a few thousand, it gets called as a "disastrous miss" by the media, though it might be nothing of the sort. We really don't know if 120,000 jobs were created in March -- just that we're reasonably confident it was between 20,000 and 220,000.

Most initial jobs reports are also revised in subsequent months, sometimes substantially. The revisions go both ways: In late 2009 we learned that job losses from early in the recession were worse than originally reported, and over the last nine months we've learned that recent jobs gains have been stronger than originally reported.

The takeaway? Find some salt, and take a big, healthy grain of it.

Misconception No. 2: The government's unemployment rate doesn't include those who have given up and stopped looking for work.
While testifying before Congress last year, a senator complained to Federal Reserve chairman Ben Bernanke that the real unemployment rate was higher than it looked. Alternative measures that include those who have stopped looking for work, the senator noted, show the unemployment rate is much higher than what's reported by the BLS.

Bernanke politely pointed out that, actually, those alternative measures are reported by the BLS.

The government calculates unemployment six different ways. The one most often used in the media is called U3, and is calculated by taking the number of people without jobs who have actively looked for work in the last four weeks as a percentage of the working-age population. That rate is currently 8.1%.

Another version of the unemployment rate called U6 includes a bunch of other people -- those who have become discouraged and stopped looking for work, and those who are working part-time but want full-time work. That rate is now 14.5%.

Both figures are reported clear as day in the monthly unemployment reports. It's up to the analyst or journalist to decide which to use.

And, importantly, every version of the BLS' unemployment rate has declined over the last few years:

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Source: BLS.

Misconception No. 3: Those who aren't eligible for unemployment benefits aren't counted in the unemployment rate.
This is a frequent criticism, and it's just plain wrong. Being counted in the unemployment rate has nothing to do with whether or not you're receiving unemployment benefits.

The unemployment rate (or rates) is calculated by a monthly survey of 60,000 households, covering 110,000 people and more than 2,000 separate regional areas.

The survey asks dozens of questions, but the two most important for determining the unemployment rate are: Did you work for pay or profit last week? If no, have you been doing anything to find work during the last four weeks? If yes, you're unemployed. End of story. It has nothing to do with unemployment benefits.

The government does report on the number of Americans receiving unemployment benefits, but it's totally separate from the surveys tracking the unemployment rate.

Now get ready for the excitement!

At the time this article was published Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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