Reviewing John Mauldin on Employment and the Economy

A thoughtful reader, considering my article yesterday where I took up the faulty analysis of subgroups in employment data, asked me about a recent newsletter from John Mauldin.

John Mauldin writes a weekly newsletter with over one million subscribers.  From his accounts, he is an influential jet-setter who knows everyone important and provides the inside scoop for his readers.  His articles are republished at the most prestigious sources.  This one was an Editor's Choice at Seeking Alpha (where I am a contributor), a feature at Barry Ritholtz's acclaimed blog (which I recommend as a top source), and praised and reprinted at The Reformed Broker (which I always read, often quote, and now add to the featured list).  At each of these sources the comments were supportive and glowing, praising Mauldin for his wonderful analysis, which (as usual) confirmed the existing beliefs of the readers.

What if he is mistaken?

I take up this subject not just to correct the Mauldin errors.  I think his group of advisors is too narrow and too bearish, but I do not think he is intentionally misleading.

But there is a broader question.

Is Economic Blogging Effective in Correcting Errors?

At the Kauffman Foundation's excellent Economic Bloggers Forum, I very much enjoyed the keynote address by David Warsh.  He is a pioneer in bringing fine journalism to the Internet.  His weekly column (now added to our featured sources) is stimulating and extremely well-written.  I recommend watching his entire address here.  For those of you without a few minutes, I want to mention one of his themes.

He discusses the differences between print journalism and blogging, and considers a "top down" versus a "bubbling up" approach.  It is a theme to which I plan to return.  For today, I want to emphasize something that does not seem to be working in the economic blogosphere.

The Internet is supposed to provide a way to correct errors.  If there is a blunder in the political realm, the correction "goes viral."  Everyone knows about the error in short order.  In the economic blogosphere it is quite different.

Errors in fact or analysis persist indefinitely.

This is especially true when the mythical statement reinforces existing perceptions.  It is even more powerful when the mythologist adduces a table or chart.  The inclusion of a lot of data adds a false sense of authority, since most readers have a poor bullshit detector.  I know in advance that I am waging a lost cause, but with Don Quixote in mind, here is a brief attempt.

Mauldin on Job Births and Deaths

Let me focus first on a specific Mauldin contention:

For new readers, the birth / death assessment has nothing to do with people dying, but rather is the BLS's attempt to estimate the number of new businesses that have been created or have "died" within the last month, and they use these numbers to adjust the employment total. They use historical, seasonal numbers to create a model from which they make these estimates. There is nothing conspiratorial about the numbers - they have to make an attempt at such an estimate, otherwise the employment number would be badly off. But the birth/death number can skew the totals a lot more than is typically realized.

Take the last two months. Using the birth/death model, the BLS assumes that 362,000 jobs were created somewhere. That is three times the number of jobs in the headlines we read. Those extra jobs were added into the total because that is what the model told them to do. And over a complete business and employment cycle, those numbers will average out to be pretty close to right. But as I said, they can also be misleading in the short term.

The first paragraph is accurate up until the final sentence.  The second paragraph is all wrong.  Here are specific errors:

1. The BLS does not "assume" anything.  Every aspect of the model is based upon the analysis of past data.
2. Mauldin makes a rookie blunder, but he is not alone.  Nearly everyone does it each month.  The birth/death adjustment is not seasonally adjusted.  The payroll employment result, the "headlines we read" as John calls it, is seasonally adjusted.  The BLS repeatedly warns that you cannot add the two together. As Barry Ritholtz wisely notes here, the non-seasonally adjusted private job creation was 863,000.  Any birth/death adjustment is added to this figure, before seasonal adjustments take place.
3. The birth/death adjustment is not calibrated to a complete business cycle, as Mauldin asserts.  It is geared to annual changes, no matter where we are in the business cycle.  This is because the cyclical part of the change is supposed to be picked up by the imputation step -- something that Mauldin does not even mention, but which I have frequently described.  These imputations have been tested on an annual basis and worked nicely for many years until early 2009.  Those making a different assertion never provide any supporting data.

Now it gets tougher, since you need to understand more about the method to see the error.  Mauldin next writes:

The B/D adjustments say that we added 65,000 construction jobs in the last two months, over half the total number of jobs created. Really? US single-family homes set an all-time low sales number this week. Mortgage applications are way down. Home construction is off. Commercial real estate construction is down. Where are those construction jobs?

The problem with this error is that it is more difficult to explain, since no one seems to understand the two-step process by which the BLS estimates job creation.

First, they employ an inference about non-respondents in the survey.  The inference, based on past data,  is that non-respondents are like those who actually respond.  Think about this.  Of the 10% who never respond, maybe half of these companies are out of business.  The BLS has learned that the offset between dying businesses and new businesses is similar to what is happening in existing firms.

Second, they use the birth/death adjustment to correct for any errors from step one.

To illustrate.  Let us suppose that the existing firms showed a huge decline in construction jobs.  This is reflected in the "imputation" step.  The birth/death adjustment only addresses the residual impact -- what is left over after imputation is finished.

To emphasize, we do not know how many construction jobs were added (or subtracted) by the job creation estimates, but we can guess from the overall report.  Construction jobs were down 22,000 on a seasonally adjusted basis.  This means that the construction job creation was "punished" proportionally at the imputation step.

The imputation step is much larger, and therefore much more important than the b/d adjustment.  It is an error to ignore this as Mauldin (and everyone else) does.

Conclusion

I have been frank about employment problems and more pessimistic than most in my regular monthly estimates.  I regularly report that we have disappointing, below trend growth that is not adding enough jobs to solve our problems.  We should stick to the facts, not making things worse than they really are.

Meanwhile, the popularity of the Mauldin piece illustrates how economic blogging actually works.  It may get better some day, but we are in the early innings of development.  We lack a vibrant community where the truth will eventually emerge.

Comments

[oldprof]

Billy -- I agree with your observation about John Mauldin. He indicated in these comments an interest in talking, so I sent him an email. He called a couple of times and we had very constructive conversations.

His weekly letter captures the personality from his conversation. I am delighted that he was willing to work so hard on the data. Mostly, it helps to get more to focus on the real problems.

I do not do a separate newsletter, but you can subscribe to "A Dash" via RSS or email.

Thanks for your comment.

Jeff

[Billy Jalbert]

Gotta give Mauldin a lot of credit for taking your feedback and posting it. He's flat out a good guy and quite frankly, thus far, he's been more accurate than most in the past 4 years or so. I'm very much a layperson. Econ minor in college, entrepreneur / small business owner and now a Realtor. I find Mauldin's stuff accessible and interesting, even if I don't agree with some of his political assessments / opinions. I recognize he isn't the Bible and appreciate your corrections.

As for the name dropping. Funny, I'm pretty sensitive to name droppers and I never felt like he was doing that. I thought he was "advertising" and just telling about his life. I've always been a bit naive, but I thought he was just sharing. He's a pretty neat story. Glad I have now found you as a resource. Do you have a subscription format as well?

[oldprof]

tiger -- Dr. Hussman is a likable, intelligent, and very persuasive person who has built an extremely successful business.

I am answering your question because I think I understand the spirit in which you ask it. You are interested in an evaluation of some Hussman theories.

Mostly I disagree with what I see as a fixation on past earnings instead of trying to look ahead. Rather than anticipate here, let me just say I am working on an article on this subject.

Jeff

[oldprof]

jdb - I completely agree with your attitude about Mauldin, the person. It is something that I always try to uphold in my analysis. It is never personal. It is about data.

And for other helpful participants who do not like the Mauldin style ---

There is a fine line in how much personal information one reveals in a blog or newsletter. Whatever you choose to do, some will agree and some will not like it.

Thanks to everyone for some helpful and sensitive comments.

Jeff

[oldprof]

John M -- Thanks for calling. I enjoyed our conversation. I appreciate your willingness to review data in an effort to provide good analysis.

I hope that some of my observations and the reports I sent you will be helpful in your work. As I noted, your influence is widespread and the topic is a difficult one.

Thanks for stopping here and for initiating contact.

Jeff

[jdb]

Thanks.

I was going to write and ask you to do just this-evaluate what Mauldin wrote on unemployment. As some have mentioned, I have listened to him for years, but have thought that he is struggling like everyone else to understand what is going on the last few years. You read his stuff, but just don't get much understanding. And I have been skeptical about his work on unemployment. Yet, I think he is a good guy, doing the best he can. Maybe this gets too personal, but he has adopted kids from all over the world and provided them a good home. This gets him a lot of credit in my book.

[John M]

Ouch! I know B/D is NSA. Jeff, I would like to talk. If I am off, then I will retract. and Proteus, sorry to have fallen from Grace. :)

John

[Proteus]

Jeff:
Thanks for the continuing discussion of the employment data. There is still much misinformation out there.

When I started reading Mauldin a decade ago, I thought he was a god. He has gradually fallen from grace, and is now unreadable, for some of the same reasons you cite. He is a friend of every well-known bear - bulls apparently need not apply. Despite his claiming to be middle-of-the-road, bullish news is overlooked. Poor forecasts and errors are never corrected. However, it was worth every penny of the subscription cost.

How to correct errors in economic blogs? Comments just don't seem to work.

[John the Cheap]

After reading Mauldin for quite a while, I have to admit I've stopped bothering. He seems to exhibit a persistent bias and while there might be some useful info there, it's too much trouble to winnow out the value from the chaff. Besides, his chatty name-dropping style irks me, and who gives a !#$%^ where his daughter is vacationing (or whatever).

[Kevin]

Very nice analysis - thank you.

[tiger]

what do u think of John Hussman?