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The Accelerating BLS Birth/Death Adjustment

I've mentioned the B/D adjustment over the years, and how its become an increasingly large portion of the reported BLS new jobs.

What I haven't previously mentioned is that over the past year, it is accelerating: the Birth/Death Adjustment has become an ever-large portion of the reported NFP payrolls.

How much larger? Well, consider the following data points: Over the five month period ending in June, BLS B/D adds was a total of 922,000 new jobs. During the same period, the actually head counted Non-farm Payrolls (NFP) job creation was 709,000.

That's right, fictional Birth/Death job adds have been outpacing actually measured job creation by some 30%.

As they do every year, BLS Net Business Birth/Death Model deleted jobs in January -- in 2007, it was 175k.  That means that year-to-date, the net fabricated BLS new jobs was 747k -- versus NFP growth of 871k -- that's 85.58% of NFP job growth.

Example of the absurdity of the new Birth/Death model -- in place since 2001 -- can be found in the specific employment sub-sectors.  Construction jobs are an obvious error (housebuilders added 12,000 workers), big jumps in education while school is out for summer is another, ‘Leisure & Hospitality’ B/D jobs are a multiple of the net category jobs created.

Prior to 2001, the B/D adds were less than 20k per month. Now, they dominate the Non Farm Payroll report.

Beneath the headlines, we see a far different reality. The FT noted:

“Wall Street economists, meanwhile, were surprised by continued hiring in the construction sector seen in Friday’s figures as  despite a prolonged housing market slump...The bulk of the hiring was in the service industries, as employers such as banks, insurance companies, restaurants, added 135,000 workers last month after hiring 199,000 workers in May. But they also pointed to signs of potential economic weakness, as the retail sector cut 24,000 positions."

Economists also said an unwelcome percentage of last month’s hiring was attributable to state and local governments, which added 40,000 staff and are not viewed as good indicators of economic activity."

I mentioned my incredulity over the fawning WSJ page 1 headline this past weekend (How Good Was NFP Really?). That is the soft prejudice of low expectations in action.

My favorite skeptic on BLS data is Bill King; Bill is even more incredulous over the reaction to what was by all measures a mediocre jobs report:

"And once again, The Street and their fin media stooges bray about how bullish 132,000 NFP jobs are (CSFB’s chief economist called the report ‘excellent.’) even though just a few years ago Street Conventional Wisdom held that the economy must generate about 175,000 jobs each month just to absorb demographic growth.

Lehman’s economist said, “The labor market is one of the stronger parts of the economy right now.” This is a Clintonesque, qualified statement. It could imply that the rest of the economy really sucks."

Sucks, indeed.

Here's Bills's chart of the past few decades NFP growth:

NFP with 1-year (12 month), 10-year and 40 year (480-month) moving averages

Source: M.Ramsey King Securities

>

As the above chart clearly shows, the June NFP number is hardly ‘excellent’ or indicative of economic strength. With NFP yearly average of 167,333, how can a release ~35,000 or > 20% less than the yearly average be ‘excellent’?

The 40-year average NFP growth is 150,600 -- and that is with a national population considerably less than 300 million people. Anyone asserting a NFP number ~15% below the 40-year average as ‘excellent’ or a sign of strength is a shill who has failed to do the math . . .

UPDATE 3 July 11, 2007 8:20am

Here this morning's article

Are Business Births as Rosy-Cheeked as BLS Says?
Caroline Baum
Bloomberg, July 11 2007
http://www.bloomberg.com/apps/news?pid=20601039&sid=arMOFpswnaAE&

UPDATE 2 July 10, 2007 3:02pm

Here is Paul Kasriel's take:

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UPDATE July 10, 2007 1:20pm

Bloomberg's Caroline Baum, who has a column on the same subject  tomorrow, points us to this explanation of the B/D adjustment from Kirk Mueller, BLS' supervisory statistician:

Impact of business births and deaths in the payroll survey
http://www.bls.gov/opub/mlr/2006/05/art4full.pdf

Source:
June jobs growth higher than expected
Eoin Callan
FT, July 6 2007 14:30 | Last updated: July 6 2007 16:27
http://www.ft.com/cms/s/07da87ea-2bc0-11dc-b498-000b5df10621.html

Tuesday, July 10, 2007 | 07:20 AM | Permalink | Comments (34) | TrackBack (0)
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Comments

It seems to me that the BLS like most government organizations (think FED) and corporate boards is attempting to manage the stock market, not do their proper jobs.

Home Depot announced a stock buyback today. Does that make any long term sense for this company? It seems to me that Depot would be better served by using the money to improve the condition of their stores and their service. Short term stock price trumps sound business decisions.

While the impact on the market is positive in the short term, this practice is becoming more widespread and will have a serious long term negative impact on the economy.

Posted by: Sailorman | Jul 10, 2007 7:58:22 AM