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« Employment Report Preview | Main | ETF Update: When Cash is King »

October 04, 2008

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oldprof

Barry - Thanks for taking the time to stop at "A Dash." I am not sure who is questioning your motives, but I do not. If I did not think you were seeking the truth and serving investors, you would not be on my list of featured sites.

On the B/D adjustment, and lets stick to that for the moment, I think you are missing an important point. The BLS needs to account for about 2 million new jobs created each month. I have explained on several occasions how they do this -- mostly by looking at behavior in existing firms and extrapolating to potential new companies through a function.

When they are finished with that -- and it is the most important method of imputing job creation -- they do the B/D adjustment. They warn you not to look at it by itself.

I really think that if we discussed this I could convince you and you could use your strong voice on the side of truth.

Meanwhile, I have a simple challenge to you and other B/D critics. I made this challenge well over a year ago, and no one has taken it up.

Just show us a single period where the B/D adjustment made the job measurement worse. We have the state employment data, so we can see who was right. The evidence comes in six months later.

I think it shows that your early criticism was was wrong, but we all make mistakes.

It is a simple challenge. Go to the state employment data. Show where you were right and the BLS was wrong. If you cannot do that, admit your error.

It is about data analysis and evidence.

I look forward to your reply.

And thanks again for your comment!

Jeff

Barry Ritholtz

The Birth Death Model used to be a minor adjustment in BLS NFP data. It has been around for many years. Since '06/07, it has become a major statistical nuisance.

The theory behind it was that small businesses are under represented in the Establishment survey. Much of the job creation comes from these smaller firms. The 2001 changes (effective 2003) BLS significantly modified the B/D adjustment. They went from a minor statistical adj to overweighted.

There were two methodological problems with this adjustment: 1) It took a primarily MEASURED data series and introduced a significant amount of extrapolated/modeled data into it (deducing new NFP job from new state Incs).

2) The model improved accuracy somewhat in the beginning of the economic cycle, but at the cost of making BLS data much less accurate at the end of the economic cycle.

Example: In 2007, about 75% of the new jobs created were due to the B/D adjustment.

~~~

Since someone challenged my integrity about the motivations for my B/D adjustment criticism, allow me to point this out: I run money, and don't care about the ideological or political battles between economic theories or politicians. I only want to protect my clients capital and generate positive returns when opportunities arise.

I cannot say the same of the people who were the staunchest defenders of the BD adjustment.

Indeed, many of the people who took the BLS data at face value, who did not delve beneath the headlines, and approached such data interpretation in a no-critical fashion got mangled in the markets.

Those "analysts" who did not skeptically approach BLS inflation data, NFP jobs info, B/D adjustment -- were way too bullish going into 2008. They believed the official data as well as the spin, if you followed the advice of less critical thinkers, you lost tons of money . . .

David Merkel

Thanks for putting this up. It ends my questioning. My main concerns had come from how they developed the annual estimate, which this answers. Less important is how they apportion it over the year, which still seems squishy to me, but if it is right over a one year period, then I don't care much about the month-to-month.

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