The Most Important Data You Missed Last Week

Here at "A Dash" we have been anxiously awaiting the release of the Business Employment Dynamics Report for the fourth quarter of 2008.  Why should anyone care about a release about data that are nine months old?

Setting the Stage

September of 2008 was the crucial time for the credit crisis, the economy, and the recession.  Until the fall of Lehman, the economic outcome was not clear -- at least to the NBER recession dating committee.   When Lehman went down, the reaction was immediate.  The creditworthiness of every institution was suspect.  Even the most normal lending via commercial paper came to an end.  Corporate executives began instant and massive layoffs, expecting the worst.

Treasury Secretary Paulson went before Congress explaining the risks and the need to deal with "troubled assets."  While legislation was passed on the second attempt, banks and corporations were not reassured.  Meanwhile, there was never any plan for the "toxic" assets.  If they were not toxic before, they certainly became so.

So here is the question:  Can you imagine a worse situation for job creation?  Would you expect ANY new companies to start, with new jobs forming in this highly negative environment?

Most of the punditry said "No!" and did so in a very loud fashion.  They tag-teamed in trashing the Bureau of Labor Statistics and especially the Birth/Death adjustment.  The mainstream media went along.  (The MSM sources are all trying to blog and compete online.  They seem to have a symbiotic relationships with the big-time bloggers -- mostly bearish pop economists.  Instead of drawing upon a strength -- depth of research and analysis -- the MSM is imitating the amateur competition.  But we digress.)

We have been very vocal in arguing that the B/D critics were wrong.  We presented several key articles, first going back to the last recession and showing the job creation.

In recent weeks we published a three-part series analyzing the Birth/Death adjustment.

Briefly put, we were "all-in" defending the Bureau of Labor Statistics and their methodology.  On a recent trip to DC, we met with some of the key people who do this work.  These are not political appointees.  They do not serve at the pleasure of the President.  The methodology is the best effort of professional statisticians and economists.  These are people who work for us, and who try to do a good job.

Those trashing them are taking advantage of their inability to respond in kind.  If you are an individual investor or trader, listening to those pontificating about "phantom jobs" or political lying, you are being deceived.  The source is playing upon your pre-disposition about government.

And the Verdict?

We took our position in advance of the actual data about Q408.  The Business Dynamics Report shows real numbers from state employment agencies.  No one pays employment taxes on phantom jobs, so the data reflect actual counts, not modeling or projections.  These data show what really happened (emphasis added on the key numbers).

Amazingly, no one in MSM saw this conclusion or the significance.

This table is drawn from the report.

------------------------------------------------------------------------
                 |      3 months ended      
                 |-------------------------------------
                 | Dec. | Mar. | June | Sept.| Dec.  
      Category        | 2007 | 2008 | 2008 | 2008 | 2008  
                 |-------------------------------------
                 |     Levels (in thousands)    
----------------------------------|-------------------------------------
                 |    |   |   |   |    
Gross job gains...................| 7,676| 7,130| 7,258| 6,822| 6,712 
 At expanding establishments.....| 6,220| 5,731| 5,858| 5,504| 5,367  
 At opening establishments.......| 1,456| 1,399| 1,400| 1,318| 1,345 
                 |    |   |   |   |    
Gross job losses..................| 7,366| 7,400| 7,751| 7,754| 8,467 
 At contracting establishments...| 6,010| 6,047| 6,277| 6,383| 6,977 
 At closing establishments.......| 1,356| 1,353| 1,474| 1,371| 1,490 
                 |    |   |   |   |    

Our Conclusion

The net effect is negative, as we all know, but that is not the key point.  People do not understand the key element of job changes --- the underlying dynamics.  There is always job creation, even at the very worst of times.

There are new jobs created from new establishments at the rate of 1.3 million over three months.  Anyone arguing that job creation is a work of fiction is not dealing with the reality of actual job counts.  This includes nearly everyone in the blogosphere.  They are either not checking the data (ignorance) or intentionally misleading (deception).

The Significance

We all want to have the best interpretation of data, whether we are investors or traders.  There is a cottage industry in attacking the BLS and the employment report, especially the Birth/Death adjustment.  No one calls to account those who make loud and inaccurate statements.

This is about to change.  Beginning with the next employment situation report we will highlight anyone in MSM  or blogs who provide accurate commentary.  We will also highlight those who stubbornly stick to criticism that has been proven wrong.

Meanwhile, we thank those who have acknowledged our extensive work on this topic, including the following -- all featured sites.   (please notify if we have missed anyone).  James Hamilton, Karl Smith, Brett Steenbarger, Abnormal Returns, Charles Kirk, and  Chris Roush.

These sources are all helping us to find the right data without bias.

Comments

[Richard3]

Keep up the good work Jeff!

[Michael]

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However, using a good market timing system can help an investor profit both from the upside and downside of this market.

Consider http://invetrics.com Its daily DJIA index trading signal switched to Long last Friday just before market open and allowed investors to profit from the sharp move higher.

The signal is up a respectable 52% for the year (as of 8/23/09) and it is free of charge for individual investors.

[oldprof]

Steve -- Thanks for pointing out the comment. I have submitted a reply at the econbrowser site.

kharris is not accurately describing what the B/D adjustment is intended to do. In particular, this statement is not correct:

"However, the birth/death plug is meant to be a net figure, between jobs created at opening firms and jobs lost at closing firms."

If you have read all three parts of my series, you understand that the B/D adjustment is a residual, not the entire process. The imputation step is very sensitive to economic conditions.

In my recent visit, the BLS experts called the B/D adjustment a "base". As the data from their papers show, it is always a positive adjustment, throughout the business cycle.

I covered this pretty carefully in part 3.
http://oldprof.typepad.com/a_dash_of_insight/2009/08/the-employment-report-and-the-birthdeath-adjustment.html
The BLS data on the stability of the residual target is compelling.

Thanks again.

Jeff

[Steve]

Jeff,

Can you respond to the last comment in the Econbrowser thread you linked: http://www.econbrowser.com/archives/2009/08/links_for_20090_5.html

Is that true what kharris said?