…
And when I die
And when I’m gone
There’ll be one child born
…
"And When I Die", Laura Nyro
According to the liturgical calendar we’re still in the Easter Season, as Newsweek reminds us [1] with a story currently appearing on MSN’s front page. Yesterday, however, frequent commenter Jan-Martin [2] and global analyst Mish [3] helped call Doom’s attention to a very different sort of resurrection. The U.S. Department of Labor’s Bureau of Labor Statistics (BLS) publishes a very influential monthly employment report, and this makes use of a controversial estimate called their Birth/Death Model (BDM).[4]
What had Mish and Jan-Martin outraged was that the BLS saw a whole bunch of jobs disappearing, and just added the losses right back in using the BDM. Well, that certainly sounded weird. Additional sounds of disbelief can be heard at The Big Picture [5] and Minyanville,[6] while a passionate voice defending the BLS statisticians is found at the Old Prof blog.[7] [8] The most immediately convincing analysis was by researcher Ray Stone, as quoted [9] by MarketWatch’s Rex Nutting. Stone simply asserts that this seems like a really dumb time to start a business in the sectors that got hammered last month, so therefore the BLS likely failed to give sensible numbers for April.
Looking for additional resources for this topic had its own goofy aspects. When I tried the obvious search on |birth death model| within Google News I got story after story on Anna Nichole Smith! (When you think about it, that almost makes sense.) I did find several stories [10] [11] [12] [13] on the questioning side of BDM. Just about everyone agrees that the numbers are volatile and prone to revision, but the markets react strongly to the slightest touch of the results. It seems much too convenient that the system is evidently rigged to deny a genuine recessionary signal should that occur.
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Notes and References
[1]: "To Treat the Dead: The new science of resuscitation is changing the way doctors think about heart attacks—and death itself", by Jerry Adler, Newsweek, 5/7
[2]: "employment report april 2007", by Jan-Martin Feddersen, Immobilienblasen, May 4, 2007. Unless otherwise stated, emphasis in the quotes is mine.
just one or two comments on the jobs report. the bls has assumed that in the year 2006 271.000 jobs were created via the "birth death model".
mhhh, now with gdp significantly lower and the economy clearly weakening they come to the conclusion that 317.000 were added. (especially the plus 12k in construction….)
this shows the problem with the model that isn´t able to adjust timely to swings in the economy. i think we could see a big downward revision in the future.
[3]: " Birth Death Model Fatally Flawed", by Michael Shedlock, Mish’s Global Economic Trend Analysis blog, May 4, 2007.
How anyone could have expected good job growth in the face of those statistics is unexplainable. But more amazing yet are the Birth/Death job assumptions this month.
…
In the face of all that slowdown, somehow the BLS model added 317,000 jobs for the month.
[4]: "CES Net Birth/Death Model", U.S. Department of Labor – Bureau of Labor Statistics, updated May 4, 2007.
# There is an unavoidable lag between an establishment opening for business and its appearing on the sample frame and being available for sampling. Because new firm births generate a portion of employment growth each month, non-sampling methods must be used to estimate this growth.
# Earlier research indicated that while both the business birth and death portions of total employment are generally significant, the net contribution is relatively small and stable. To account for this net birth/death portion of total employment, BLS is implementing an estimation procedure with two components: the first component uses business deaths to impute employment for business births. This is incorporated into the sample-based link relative estimate procedure by simply not reflecting sample units going out of business, but imputing to them the same trend as the other firms in the sample.
[5]: "NFP: The Return of the Over?", by Barry Ritholtz, The Big Picture, May 4, 2007.
As King observes, "BLS has consistently overstated the Preliminary B/D job creation. After tax, state and other data is available, the number of B/D jobs added have been revised lower." [italics in original]
[6]: "Five Things You Need to Know: Economic Deceleration Contained to Overall Economy; GM Losses Contained to Auto Sales and Subprime Lending; No Worries!; What Exactly Is a Moratorium?; Hey There, Little Filly!", by Keven DePew, Minyanville, May 4, 2007.
# Since the beginning of the year, the birth/death model has accounted for a net 388,000 jobs.
# Last year it added 964,000 jobs.
# The kicker is that the Bureau of Labor Statistics refuses to allow academics and commercial economists access to the models they use for the birth/death additions. [italics in original]
[7]: "Little Known Facts about the Payroll Employment Report", by Jeffrey A. Miller, Ph.D., OldProf blog, May 2, 2007.
Critics of the birth/death model generally provide a very lame analysis. Any such critic should step up to the plate and suggest a better method. The BLS takes the actual state count at the end of the year. They go back to their methods and try to improve them by building this in. Many critics do not like the need for this revision, but they have nothing better to offer.
…
Big-time commentators do not understand this. It is a pretty cheap shot to critici
ze the government, claim that revisions are political, and offer one’s own view of something like a "birth/death model". The BLS economists do not go on CNBC to defend anything, so it is an easy way to look smart and sell research to institutions. Do not be fooled by this! [link and emphasis in original]
[8]: A comment by Miller under [6] responding to a criticism by Ritholtz
As a daily reader of The Big Picture I know how you feel about the Birth/Death model, but I think your conclusion is incorrect.
I suppose that I’ll need a separate piece on Birth/Death, but let me summarize for the moment.
First, it is incorrect to say that "like any model, it has an inherent bias." The time series is reviewed quarterly and updated if necessary. If there is a bias, they try to catch it soon.
Second, it is compared to actual data annually. That is the benchmark.
Finally, the fact that over 40% of job growth comes from new businesses is reality — and a reality that has been downplayed for years at The Big Picture. One of my great disappointments is that when the actual data came in, you never said "Wow, that was bigger than I thought."
[9]: "Housing slump not reflected in payrolls yet", by Rex Nutting, MarketWatch, May 4, 2007.
But the figures this year are "inconceivable," said Ray Stone, chief economist for Stone & McCarthy Research. He notes that the 188,000 includes some 49,000 jobs that were supposedly created by new construction firms entering business, theoretical jobs that were added to the actual jobs reported by construction firms in the government’s monthly sample.
The government’s birth-death model "has done a pretty good job overall" of accounting in real-time for the births and deaths of firms that are picked up in the official data only with a long lag, Stone said in a commentary to clients.
But the model likely failed in April, because it assumes that this April was like previous Aprils in terms of the business environment. Clearly, with housing starts down 23% in the past year, it’s not a good time to start a residential contracting business.
[10]: "U.S. Data Baffling", by Chris Gaffney, Daily Reckoning, May 4, 2007.
Overshadowed by the strong ISM numbers were the weekly initial jobless claims, which did tick down, but remained above 300K. Continuing claims also dropped slightly. The markets’ focus is on today’s release of the monthly jobs data as it will be the last major economic data release prior to the FOMC’s meeting next week. The bar has been set pretty low as the consensus among economists is for the monthly figures to show an increase of 100K. With all of the positive data released this week, and that wonderful "birth death model", I think we will see the numbers come in just above the consensus at 107K.
But even if the numbers come in as expected, the unemployment rate will tick up as 100K jobs won’t be enough to keep the rate at the current 4.4%. I continue to believe the FOMC has no choice but to leave rates right where they are and continue their "wait and see" attitude. I don’t care what the data shows, the U.S. economy isn’t anywhere near the bottom which we will likely see later this year or early 2008.
[11]: "Jobs Number Crunch: Inflated Report Likely", by John Crudele, New York Post, May 3, 2007.
But, as I said, this won’t be an indication of economic growth. But it will be an indication of how faulty the government’s economic gathering can be.
I’ve written about this many times before but since Wall Street and the Labor Department haven’t caught on yet, I am forced to repeat myself.
The Labor Department uses something called the birth/death economic model in its monthly jobs tally. Put simply, the "birth" part of this model is a guess by the department on the number of jobs created by newly-formed companies that are outside the reach of its survey.
The "death" part is the opposite guess – how many companies have gone out of business and taken jobs with them that aren’t reached by the surveyors.
Not surprisingly, most of the time the government estimates that there are job gains from newly formed companies. Only twice a year does the "death" portion of this model kick in.
[12]: "David Fry’s Market Outlook for Friday", by David Fry, SeekingAlpha, May 4, 2007.
Friday we get the employment report, which will be massaged greatly by "seasonal" factors and the "birth death" model. Whatever number is reported will be revised one way or another later.
The bullish mood is pervasive, so any ordinarily bearish number may get tossed aside. That’s been the ongoing story — accentuate the positive and negate the negative. (I believe that’s an old WWII era song lyric.)
[13]: "Severely Damaging Trade Relations?", by Chuck Butler, Daily Reckoning, April 10, 2007.
Yesterday, several people asked me to explain the birth/death model that the Bureau of Labor Statistics uses, and while I have done so in the past, I’m reminded that there are new readers all the time, and since this is an important piece of information, I will explain it (hopefully) again.
The BLS uses a model that assumes (remember what we learned early in life about when you assume something) that dying businesses have their equivalent in newborn businesses. In other words, the higher the death rate (of businesses) when the economy turns down, the higher the report birth rate.
I can say that among all the absurdities that thegovernment uses, this could very well be the worst!
So, each month, the BLS reports jobs created from their birth/death model. It’s all hocus-pocus in my opinion. …
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John,
These quarterly and monthly number reports are such a scam. The only folks that can’t lie are those that are connected with the Stock Market. Even they can lie, but it takes a big effort.
The government reports the numbers it thinks will not have too much of an impact. Then almost assuredly “revises” them downwards after the media got the word out. They know most of the sheeple will not check back after the initial release and thus they can actually report the “real” numbers they knew all along. Its an appalling and despicable practice… but that is all we have.
All of this has been known for years (decades). These numbers are notoriously volatile. The real sham is that anyone puts credence in the published number. This statistic used to be buried in quarterly reports 25 years ago. Now it is held up as a prime guage of economic activity. Politicians and stockbrokers are the only ones that tout this drivel.
An even worse statistic is the jobless claims number which only tracks those claiming workers unemployment benefits. Fact is 55%+ of the national workforce is not covered by this benefit (small companies, self-employed).
Most people have a gut feeling that something isn’t right regardless of what the “statistics” say. Go with your gut.
Tobby-
It always amazes me when these reports are released. The MSM says up, or down, whatever- sometimes they mention MOM, YOY, sometimes they don’t. I go to the Census Bureau, the Commerce Dept., whoever is releasing the data, and see some figure like “up 3% (+/-15%)” and I know the report is meaningless, but the stock market soars to new highs.
Too many people have gotten lazy, and don’t pay attention past the soundbites. Of course, I’m preaching to the choir here. That’s why we at Doom appreciate the folks that stop by- obviously you’re here because you know MSM soundbites don’t provide enough information.
Thank you, John and jan.
I had to read that BLS page probably a half dozen times over the course of this weekend but I *finally* get it.
I finally understand what the Birth/Death model is (I must be slow) and why some people are warning that the employment figures can’t be trusted.
I had no idea that so much of the official government figure (two-thirds!) was based on “impute[d] employment” from assumed business births.