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Absurdly Large BLS Revisions, part II

Our previous look at this Absurdly Large BLS Revision simply wasn't satisfying; So I had to spend some additional time reviewing this data . 

Here is the official BLS statement:

"Each year, the Current Employment Statistics (CES) survey data are benchmarked to comprehensive counts of employment for the month of March derived from state unemployment insurance (UI) tax records that nearly all employers are required to file. For national CES series, the annual benchmark revisions over the last 10 years have averaged plus or minus two-tenths of one percent. The preliminary estimate of the benchmark revision for March 2006 is +810,000 (0.6 percent).

BLS currently is researching possible sources for this larger-than-normal expected benchmark revision. On initial review, the difference between the CES sample-based estimates and the UI employment counts does not appear to be concentrated in any one industry or geographic region."  -BLS Benchmarking Revision

>

"Researching possible sources" -- let's call that the bureaucratic understatement of the year. The BLS has a benchmark restatement that is 300% of its 10 year average, and they announce: "We are looking into this."

I am waiting to speak to a statistician at BLS (they appear to be closed on Columbus Day), but if we were to take this data at face value, than the economy is MUCH STRONGER than previously data would have us believe. From March 2005 through March 2006 NFP growth averaged 236,000 a month versus the past 2Qs of ~119,000.

If the Fed is data driven, and if they consider this BLS Benchmarking reliable, then the issue at hand is this: This would make the Goldilocks scenario far less likely, and it would undercut the entire basis for the recent Bond market rally. Given this newfound economic strength, they should be back on their tightening campaign sometime soon.

Bill King is even blunter:

"For months the Fed has professed, some say groveled, that it is ‘data drive’. We, as you all know, have been questioning the veracity of government data for over a decade. We now know that some very important data that has been driving the Fed is wrong. The Fed has transacted policy off faulty data. Ergo, Bomber Ben’s decision to pause could be based on faulty data. And interest rates and US productivity could be based on erroneous data. Therefore investor and trading decisions for much of the past year and one half are based partially on faulty US economic data."

I am curious as to how BLS missed nearly a million jobs; Did the businesses who did all this hiring forget to report back to the CES ?

John Williams, of Shadowstats.com, reports that

"the September employment report showed severe deterioration, despite a number of reporting gimmicks... This is despite the comparative annual boosts starting to show up in data from the effects of last year's terrible hurricane season. The heavily touted annual gain in September retail stores sales is a prime example of such an effect."

I suspect that this revision may accidentally reveal a few economic and market truths:

1) Is the Fed really data-driven, or do they merely say that because it is more palatable than admitting this is all a seat of the pants exercise?

2) Has the equity market rally truly been based on a Goldilocks scenario, or has it been correctly anticipating a bold and robust economy?

3) Was the bond market anticipating a slow down? Given all this hiring and economic strength, we have to wonder how real their fears and concerns actually are.

 Something strange is afoot at the Circle K: Either the economy is much stronger than we previously believed, ending the Goldilocks scenario -- or the data driven Fed is reliant on what we now know to be bad data.

Neither case presents an attractive outcome.

Monday, October 09, 2006 | 01:30 PM | Permalink | Comments (36) | TrackBack (1)
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Comments

Not taking sides. Just wondering... has the much-maligned ADP survey been right all along?

Posted by: Anon | Oct 9, 2006 1:39:29 PM

How do these revisions square with the Household Survey ???

~~~

BR:

You mean the survey that includes FARM Payroll (as opposed to Non-Farm), family workers, uncompensated employees, and freelancers?

Before assking that, you should read this: Redux: Household versus Establishment Surveys

Posted by: oo | Oct 9, 2006 1:47:18 PM

Fed Funds pricing in 30% chance of cut now rather than 20%

Posted by: Lo | Oct 9, 2006 1:52:59 PM

Thank goodness the market is always right, and NEVER data driven. Shouldn't fight the Fed, but worshipping their every utterance seems a mistake as well. I can think of several folks profiled in the Market Wizards books whose opinions on the market right now I would value at many multiples of anyone at the FED.

Posted by: lurker | Oct 9, 2006 2:03:20 PM

OT - just a quick off-topic tidbit for Barry: that La Jolla house you posted several months ago has dropped it's asking price from $24MM to $18MM, fwiw.

Posted by: mike | Oct 9, 2006 2:04:43 PM

Barry,

I'm a bit surprised by your statement that this would "end the Goldilocks scenario". Correct me if I am wrong, but I thought your view was that we wouldn't see a soft landing because the popping of the housing bubble would cause more damage than expected, sending the economy into a serious recession (and realization of this is what would send the Dow to 6800).

If this data is correct and the economy is much stronger than anticipated, it would seem to indicate that the economy is in better shape to weather the ending of the housing bubble and that there is a better chance that the economy will either not fall into recession or that it will be much less severe if it does.

Did you make that statement assuming that the higher growth would lead to more Fed hikes, which would then lead to a worse economy or do you think this increases the inflation risk? Since an economy in a deep recession would not seem to have much inflation risk, I don't see how a fear of higher inflation (due to this data) fits with the housing bubble driven deep recession model.

If one felt that the economy wasn't going to go into recession, I could see how this new revision would drive nervousness about higher inflation, however. For that reason, I suspect the gold bugs will welcome it.

Posted by: cornerkick | Oct 9, 2006 2:08:02 PM

GDP declined from 5.6% in 1Q to 2.6% in 2Q and yet the labor market is tight??

I'm confused.

Posted by: S | Oct 9, 2006 2:09:36 PM

that 5.6% was due to Katrina crushing the 4Q GDP , so 1Q was pushed upwards .... average 4Q 2005 and 1Q 2006 for more normalized #

Posted by: mm | Oct 9, 2006 2:14:48 PM

Yes, this could end the Goldilocks scenario, by making things too hot. You're confusing what BR thinks with what the market is pricing in. If the market were pricing in a hard landing, prices would be behaving very differently than they are.

The real question for me is whether the bond market and Bill Gross are right, or whether the stock market and James J. Cramer are instead. The former is trading as if Goldilocks and the soft landing were the blue-sky upside, the latter as if that same scenario were the gloomy-stormcloud downside. They may yet coincide, but it seems highly unlikely.

For now, put me down in the bond-market camp, though given those revisions, I have been revisiting my models and expectations.

Posted by: wcw | Oct 9, 2006 2:16:31 PM

Of course the data is flawed, because the BLS methodology is flawed. They are measuring the economy based on how it has been in the (distant) past rather than how it is structured today. As they report on their site "The production and nonsupervisory worker hours and payroll data have become increasingly difficult to collect, because these categorizations are not meaningful to survey respondents. Many survey respondents report that it is not possible to tabulate their payroll records based on the production/nonsupervisory definitions." Small samples and poor data collection methods result in faulty reports. This is classic bureaucratic GIGO (Garbage in, garbage out).
BLS needs to reconcile the CES methodology to reflect real employment and pay in today's economy. This includes incorporating data that is now reflected in the household survey, ADP etc.

Posted by: TJR | Oct 9, 2006 2:17:47 PM

Oh, and PS -- seen the homebuilders today? Up 3%, with bonds also up (if only slightly).

It's improbable that both are right.

Posted by: wcw | Oct 9, 2006 2:18:15 PM

Is it possible that they are just cooking the books before a big election?

Posted by: Paul Jones | Oct 9, 2006 2:26:11 PM

"BLS needs to reconcile the CES methodology to reflect real employment and pay in today's economy"
Doing so might open a political can of worms if questions such as the following were to be answered honestly: Do employment and productivity stats include the wildcard of 12-20 million illegal immigrants in the workforce? How much has American wage inflation been subdued due to the deflationary effect of cheap labor from South America? Does the trade deficit include $20B cash sent by laborers to Mexico each year? How much money leaves the country in exchange for imported illegal drugs? Any trust in government statistics is misplaced.

Posted by: fred hooper | Oct 9, 2006 2:51:48 PM

You have to remember, just announcing such a huge revision is as much political as data driven.

I doubt that large of revision stands, even ADP wasn't that high.

Posted by: Cherry | Oct 9, 2006 3:07:29 PM

Where are Cramer's pompoms?

Need to see them to trigger that sell signal.

~~~

BR:

Here: A chest pounding editorial in the WSJ

The Consumer Lives

Posted by: Michael C. | Oct 9, 2006 3:52:49 PM

"GDP declined from 5.6% in 1Q to 2.6% in 2Q and yet the labor market is tight??"

Here's a theory. We're transitioning from an economy based on consumer spending to a meritocracy. You now actually have to be skilled to be productive (and highly paid) and there is a shortage of talent. This transition also means that consumers, who mainly do repetative tasks ripe for automation, are starting to suffer (see median wages). Productivity is now a threat to wealth equality and it's accelerating. I don't agree with much Jeremy Rifkin writes about in "The End of Work" but the data is a bit scary.

Throw in global wage arbitrage and the deflationary effects of accelerating technology and you have one weird bowl of soup.

Posted by: KirkH | Oct 9, 2006 4:01:54 PM

Not buying the revision for a second until I hear where the numbers came from. The admin has been desperately seeking good jobs numbers forever, and suddenly they find nearly a million less than a month before the election? I mean, really.

Posted by: David Yaseen | Oct 9, 2006 4:07:25 PM

I think we need to start looking at better ways to do surveys. When we count all the jobs from all the unemployment insurance tax records we count 810K more jobs than the employment surveys predict. Also, wage surveys are showing that wage growth has been stagnant but when we count all the income from all the tax receipts, counting all monetary compensation up to the 90k SS cutoff and only the Medicare part above the cutoff, "Contributions for government social insurance" are up over 9% for the year (BEA, through Q2). Payroll taxes have been increasing faster than GDP over the past 3 years and is pushing the SS surplus and the on-budget deficit up significantly. We need to look at why wage survey data is not showing the massive increase in compensation found from counting all tax returns.

Posted by: TDM | Oct 9, 2006 4:23:53 PM

From Bloomberg:

Oct. 9 (Bloomberg) -- Columbia University's Edmund S. Phelps won the Nobel Prize in economic sciences for his theories on keeping inflation stable in an economy by limiting the expectations of price increases...
The winner gets 10 million Swedish kronor ($1.37 million) which is roughly enough for a down payment on a modest one bedroom condo in downtown San Diego.

OK, that last bit is mine. I imagine the aptly named Fed would love to keep that guy fat and happy considering BR's last post.

Posted by: KirkH | Oct 9, 2006 4:25:25 PM

In re meritocracy, pleasee see this. The comments thread is long, but here is a good one I didn't write: "1. The competition for talent leads to increased inequality. 2. We are experiencing increased inequality. 3. Therefore, we are seeing a competition for talent, and 4. Therefore, we live in a meritocracy. - which is obviously full of holes."

As for consumption, please see my chart of consumption as proportion of GDP and explain how that congrues with your hypothesis.

Posted by: wcw | Oct 9, 2006 4:29:45 PM

huh? "but if we were to take this data at face value, than the economy is MUCH STRONGER than previously data would have us believe"

This doesn't change GDP, does it?
If not, it sounds to me like more people were working,
but for less money than originally thought and with
less productivity. Why does that imply tightening?

Posted by: RP | Oct 9, 2006 4:43:33 PM

As 'wcw' notes there has been a lot of discussion of meritocracy WRT income distribution but the highest levels of compensation don't seem to have much to do with what most people would call merit, they have to do with the ability to extort high levels of economic rent (http://en.wikipedia.org/wiki/Economic_rent).

The following from Maynard's Creative Destruction is illustrative (abstracted from http://tinyurl.com/f5skr):
--------
"With the development of communication and computer technology and the greater reach of large corporations in the last several decades, our productive technology is increasingly characterized by scale economies ....

Two examples. Microsoft dominates the "market" for operating systems because of network effects: the more people who use Windows, the more valuable it becomes for the marginal user. Tom Hanks gets paid an outrageous amount of money because the distribution of his movies has become so sophisticated. It costs next to nothing at the margin to distribute one more copy of the same movie, so he is able by dint of a slight advantage in talent over a performer that no one has ever heard of to dominate the market. This means that there are huge monopoly rents that are up for grabs across huge swaths of the American economy.

In the old days when the economy was insulated to some extent from the rest of the world ...you might have seen workers take a big chunk of these rents. But in the present environment, the rents go to those in the strongest bargaining position, namely the executives at large corporations and institutions and the performers who always have the recourse to walk away from the next film (or music, or sports) deal. ...our "meritocracy" is rewarding people based on individual talents ...[B]ut the talent that is being rewarded is the talent to extract rents, not the talent to produce a higher quality product than the competition. Rewarding that particular talent produces no benefits for society; there is no economic argument to justify such a meritocracy ...."
--------

This suggests an alternative explanation for the 'conundrum' presented by the BLS revision: Lots of workers lacking sufficient 'new merit' are scrabbling for less money in real terms with a larger proportion of GDP going to more successful rent seekers. Since the latter activity contributes little to productivity our economy may not be doing so well after all even if the BLS revision proves accurate.

Posted by: RW | Oct 9, 2006 4:57:27 PM

My conclusion about a meritocracy isn't a result of evidence of rising wages for the already wealthy.

Newspapers are collapsing in unison as bloggers gain readers. Microsoft is slowly dying as it faces competition from open source (Linux and Open Office) now that the market is maturing. Movie distribution? Have a look at Blockbuster's lame response to the threat from Netflix, Bittorrent, YouTube, Amazon Unboxed and Apple's forthcoming Itunes mystery box. Phone companies are struggling as people begin to use Skype for long distance and even for moble calls as wireless internet access starts to cover cities.

I just can't imagine that the rent share of profit is increasing in a world of information set free by the Internet and open source software.

Posted by: KirkH | Oct 9, 2006 6:16:50 PM

This doesn't exactly inspire confidence in our system of economic management. I guess we have to be skeptical of most data points and rely more upon gut feelings based upon a combination of data and anecdotal information. On that basis, here's what we know:

• A housing bubble is bursting.
  
• The economy is slowing.
  
• Consumption is outpacing income for most of us, as we have more debt and less savings.
  
• The trade and budget deficits are real and significant.
  

Posted by: Detroit Dan | Oct 9, 2006 6:17:02 PM

i know my company a very large communications provider ... has cut budgets ... no slashed them going into next year. also they let go all contractors go. only keeping some essential ones to finish up projects thru the end of the year. all these tecj workers are now out work as the roll out of the new network has slowed to a crawl. its up, but its up on a shoe string.

Posted by: christopherrobin | Oct 9, 2006 7:39:59 PM

KirkH, today's Google/YouTube transaction speaks to rent share of profit. Just because MSFT is now spelled GOOG doesn't change economic verity. Change simply happens a little faster these days. I even think Google may be better at a few things than anyone else, but their buy-vs-build decisions the last couple years (blogger, now youtube) speak to their assessment of the relative value of merit vs rentseeking.

Google are a lot of things, but pace Mark Cuban, they are not morons.

Posted by: wcw | Oct 9, 2006 7:42:48 PM

I am gravely suspicious of both the timing and the magnitude of the "revision" but am entirely satisfied that it has no bearing on what is happening right now. On Sept 23, I mentioned in a thread here that the listing count for tech jobs in Atlanta at computerjobs.com had dropped noticeably since July and was at 2895. Tonight I see that it is 2639 which is close to a 9% loss in about two weeks. You could assume that part of that is due to listings expiring at the end of September, but they should have been offset by new listings or extensions since it is still the Fall hiring season.

You can certainly argue that neither the Atlanta market nor computerjobs.com is necessarily the best possible indicator for the tech market as a whole, but for the past 6 years I have found this to be a very reliable way of taking the pulse. If listings are falling, it means that management is postponing or curtailing projects and/or business in general is heading in the wrong direction. And tech is one of the first things to be gutted when tightening begins.

Whether these jobs are in tech companies as such or in the IT depts. of non-tech customers, this does not bode well for the tech sector which in turn does not bode well for the overall market. I have no doubt that a rosey picture will be painted thru the elections, but don't see how the reckoning can be put off too much beyond that point.

Posted by: whipsaw | Oct 9, 2006 8:06:29 PM

I fail to see how this information makes the economy stronger now. It was stronger before, but not now. Think back to the July ADP number that was so much stronger than the number the BLS put out. That ADP number got derided by everyone for being so out of whack. It seems there is a very real possibility it was right (if I remember correctly there estimate was over 200k and possibly around 300k new jobs for the month, where the BLS number was low 100k).

Now take this information and apply it to productivity. Productivity numbers are far lower for the past 1.5 years. One of the key arguments the bulls make for the anemic job growth as reported by the BLS is that productivity gains mean that we don't need to add as many jobs to the economy. That, according to this number is not the case. Productivity is lower and more jobs do need to be added.

Now consider the most recent month's job numbers from both the BLS and ADP. BLS reported 51k and ADP reported 78k. ADP noted when they released the number that job growth had slowed significanly. Layoffs by some of the larger companies in America would seem to confirm that e.g. Ford, GM, Intel, Hovnanian, etc.

I don't know what it means for inflation. If job growth was more robust leading up to the summer, and the most recent month is showing a sharp decline not just in the jobs number, but also Philly fed, ISM, and revised GDP then we could actually be experiencing a harder landing right now.

Posted by: Mike | Oct 9, 2006 8:10:14 PM

This whole BLS/data revision thing reminds me of George Orwell's Ministry of Plenty in the book "1984."

Posted by: babycondor | Oct 9, 2006 10:02:29 PM

TJR's comments above are right on.

Posted by: diva | Oct 9, 2006 11:16:33 PM

Hmmm, these guys are essentially all about massaging numbers these days and hence peoples expectations and hopes. I may be wrong but I believe that if goldilocks didn't exist this time around they would damn well make sure the numbers got as close as possible. I am not convinced we have free markets at all these days. Its just....a bit pathetic really. Oh and really worrying.

Posted by: Si | Oct 10, 2006 12:09:25 AM

Why is the following scenario wrong?

- Americans will slow their consumption as they can no longer tap out their home equity and because there is no end in sight to the exodus of high-paying jobs (while importing H1's to continue undercutting local talent).

- Because fewer dollars show up in foreigners' hands, foreigners recycle fewer dollars into US treasury instruments. That means lower demand for US debt.

- With less demand for debt, long-term interest rates go *up* rather than down. (The reverse of the conundrum we saw the past few years...let's call it the "reverse conundrum").

Posted by: wunsacon | Oct 10, 2006 1:46:58 AM

whipsaw: My R&D team, being stretched awfully thin after a string of departures, has been denied new hires due to cost cutting. Offshoring, pardon, "colocation", of non sales/support staff is part of the picture, but in my modest opinion more as a cost generator than saver. Management, at least at face value, entertains the notion that we can do substantial innovation, where ongoing bugfixes and a modicum of upkeep is probably much closer to the truth. Perhaps one or two projects where we heavily compromise on scope/quality. Which has been communicated, but it didn't help.

Posted by: cm | Oct 10, 2006 2:35:11 AM

If interest rates go up I want to be in commodities where demand is stable and supply is going down or better yet, ones where demand is increasing, and supply is going down. this assumes inflation is going up and demand from an ever increasing world population is increasing.

Sounds like profitable insurance companies works out.

No matter what the numbers are (and I think a revision like the .6 revision are at least suspect in either results or method) the question is the relative percentage to the number of people who could be working in the population and what is the trend of that number? What is the trend of those in the population who cannot find work?

The question of changing technologies and focus on one company or another is inevitable. Not comfortable for those displaced, just inevitable. An economicly displaced population which can contrast it's state to those who are doing very well is dangerous. Either in how they vote or how they act. The inefficency of paying so much of our taxes to those holding our notes is incredible.

Lowering taxes through borrowing has proven to be good for companies but not those who foot the bill. Anyone want to prove to me that low debt is bad? Why would I prefer a well run cash rich company to a badly run debt ridden company? Now apply that to a country. Both entities utilize the wealth produced by people. How well we utilize that wealth according to our stated intentions matters in either case.

Be well.

Posted by: alexd | Oct 10, 2006 5:02:48 AM

Jobs number indicating economy is slowing dramatically

NEW YORK (Reuters) - Sweeping revisions to U.S. jobs data indicate the labor market was considerably more vibrant last year than previously thought.

The problem: the boost to past employment makes a recent pullback in hiring seem all the more abrupt, suggesting a stumbling housing market is dragging down other parts of the economy.

http://today.reuters.com/news/articlenews.aspx?type=reutersEdge&storyID=2006-10-09T182108Z_01_N09294054_RTRUKOC_0_US-ECONOMY-JOBS.xml&from=business&src=100906_1426_INVESTING_comment_n_analysis

Posted by: samuel | Oct 10, 2006 5:12:08 AM

whipsaw -

Did you notice a Fortune 50 company in Atlanta recently layed off an undetermined number of employees?

Here's an interesting article indicating the timeframe housing and retail may affect employment:

http://www.financialsense.com/Market/cpuplava/2006/0906.html

Posted by: Atlanta_Renter | Oct 10, 2006 9:17:13 PM

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