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« Little Known Facts about the Payroll Employment Report | Main | Economic Indicators and the Market: Interesting Data from a Great New Site »

May 04, 2007

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oldprof

Jene -

Our mission is to help investors make accurate interpretations of government data. Those of us engaged in that effort avoid terms like "alchemy." It suggests that one's viewpoint drives the interpretation of data rather than allowing the data to lead.

The first thing that you should understand is that the job creation in the US economy exceeds 2.5 million jobs each month. The adjustment, is a rather minor factor that has improved prediction in every year since its implementation.

I guess I need a follow-up post on this.

Thanks very much for your comment. I am quite sure that your viewpoint -- largely due to massive dis-information -- reflects the feelings of many.

Jeff

Jene

The bls jobs report for oct 2007 added 103,000 jobs as a result of the birth/death alchemy. That does not look 'small and stable' and neither do its other contributions.

http://www.bls.gov/web/cesbd.htm

oldprof

Thanks for taking the time to comment, K and Mike. The BLS provides a lot of information about methods and also raw data on the site. Those of us who like to dig in and do our own analysis always want more. I do not think they are intentionally hiding anything about the birth/death method, but it would be nice to have more description of the methodology.

I cannot find a seasonally adjusted, birth/death contribution on the BLS site. Goldman Sachs is out with a report estimating the construction sector contribution at 19,000, and warning (as I did) about the error in these point estimates. The error bands overwhelm the estimates. Goldman also points to the Household Survey and quarterly unemployment records.

There is no real history to analyze, since they have only been doing this adjustment for a few years.

Mike

Thanks for the post. On the BLS website, they do post the adjustment by sector. Also, on the website, BLS states, "The most significant potential drawback to this or any model-based approach is that time series modeling assumes a predictable continuation of historical patterns and relationships and therefore is likely to have some difficulty producing reliable estimates at economic turning points or during periods when there are sudden changes in trend." DO you have any thoughts or historical perspective on how birth/death adjustments may have skewed data in the past? Thanks.

sk

What I find difficult to accept is that, as you point out, the BLS on their webpage www.bls.gov/web/cesbd.htm say that the "net contribution (of B/D portion )is relatively small and stable". I wish they'd quantified that - by my reckoning, it certainly was NOT stable in 2006, and 2007 and it isn't small either, if compared to the change in employment. It is perhaps small compared to total employment but people look at the MoM change !
Talking of change, if they are using time series forecasting, then I'm really surprised they aren't stationarizing the time series and using differences; perhaps their B/D model does use differences but we'll never know since they don't publish it !

I hope they appreciate why this sort of ambiguity in wording and their refusal to publish the B/D model leads to considerable scepticism and conspiracy theories about "spin", happy talk and so on. But given this government's record on "truth , justice and the American Way" - perhaps its not just bureaucratic tone-deafness - but that's for a different blog...

-K

oldprof

Barry --

Thanks for your comment. The birth/death estimates have gotten large because of a fact: much of the economy was missed in the regular payroll survey. The increased size does not make the method more fictional; it makes it more necessary.

On the 49K, I am most curious about where you got that number.

Thanks,

Jeff

RK

Love the dig at Abelson's column in Barron's. I studiously avoid reading it. It is the single most useless column in Barron's. You should write for Barron's instead of Mr. Abelson. Barron's readers would benefit.

Barry Ritholtz

As noted in yesterday's post, its hard to ignore the ANNUAL contribution of the B/D model to overall job creation measures of the BLS.

The B/D adjustment has become very significant. It has had a major impact on BLS Non Farm Payroll total numbers. In 2006, for example, of the 2.26 million new jobs that BLS reports as being created, 964,000 -- nearly half (42.6%) -- were due Birth/Death adjustments.

That moves from the realm of counting and estimating to a different place, where we hypothesize and guesstimate -- a process that is far less objective, reliable and accurate.

As to the seasonal adjustments on the monthly data, consider this: Of those 317k new jobs hypothesized by BLS for April, 49,000 of those supposed jobs were in construction. Now what are the odds of that corresponding directly to reality?

oldprof

Good question!

Our general point is that too much emphasis is place upon payroll employment as opposed to the collection of economic indicators.

The other indicators do not suggest anything like a contraction of 500K jobs. Our research, and the work of the highly-respected ECRI (google it in our search box for specifics) suggests quite the opposite.

Having said this, the BLS method does not catch dramatic turning points. Last year the benchmark added close to a million jobs over the course of a year. The methodology could also miss a negative turning point, although probably not as dramatic as you posit in your question.

Thanks for your excellent question.

Jeff

theroxylandr

Do I understand correctly that birth/death model makes serious mistakes when underlying trend makes sharp changes?

For example, if actual job count contracted in April by 500k jobs after March +180k jobs. Will B/D model actually smooth the picture and show much less of the contraction (which will take months to count properly)?

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