Time to Remove the "L" from "BLS"

For seven consecutive months the Bureau of Labor Statistics (BLS) has revised downward, prior job loss data.

The New York Times mentioned this on March 6 in Will Job Numbers Keep Being Revised Down?

Robert Barbera, the chief economist of ITG, points out a more disturbing trend: The Labor Department keeps concluding that its initial estimates were too optimistic.

Here are the total job losses reported for recent months, as originally reported and as shown in the latest revisions.

August 2008: Initially 84,000, revised to 175,000
September 2008: Initially 159,000, revised to 321,000
October 2008: Initially 240,000, revised to 380,000
November 2008: Initially 533,000, revised to 597,000
December 2008: Initially 524,000, revised to 681,000
January 2009: Initially 598,000, revised to 655,000
February 2009: Initially 651,000, as released today.

On average, from August through January, the first estimate was too optimistic by 112,000 jobs.

March Jobs Data

Inquiring minds are now investigating the BLS March Employment Report for additional revisions.

Sure enough there were more revisions. However, instead of revising the February data, the BLS revised the January data a second time as follows.

The change in total nonfarm employment for January was revised from -655,000 to -741,000, while the change for February remained -651,000.

A tip of the hat to Gonzalo who sent me the Times link. I am going to start tracking these revisions going forward.

For more details on March jobs, please see Jobs Contract 15th Straight Month; Unemployment Rate Soars to 8.5%.

Birth Death Madness

Naked Capitalism has a series of four interesting charts in Guest Post: Non-Farm Payrolls Report: Revisio ad Absurdum Here is the one that most caught my eye.



click on chart for sharper image

There is simply no way there is net new business creation or a pattern this consistent in face of the biggest recession since the great depression.

Limitations of the residual net birth/death model

The BLS explains the flaw in its own methodology quite nicely. Please consider Technical Information: Estimation Methods for Business Births and Deaths.

Limitations of the residual net birth/death model

The current modeling technique consistently reduces error in the estimate of nonfarm payroll employment, as compared to making no adjustment, however it has limitations. The primary limitation stems from the fact that the model is, of necessity, based on historical data. If at some future time, there is a substantial departure from historical patterns of employment changes associated with the residual of net business births and deaths, the model's contribution to error reduction could erode.

Because there is no current monthly information available on business births, and because only incomplete sample data is available on business deaths, estimation of this component will always be potentially more problematic than estimation of change from continuing businesses.

Birth Death Model Horribly Wrong At Turns

In short, the BLS model is horribly wrong at economic turns. We have been in recession for a year and a half, and the BLS is clearly using a historical model from a non-recessionary period as its guide.

Frequently Asked Questions

Let's wrap up with CES Birth/Death Model Frequently Asked Questions.

Q: Are birth/death factors seasonally adjusted?

A: No, they are calculated using population data that is not seasonally adjusted and the factors are applied to the sample-based not seasonally adjusted estimates. Months with generally strong seasonal increases such as April, May and June generally have a relatively large positive factor. Conversely, months with overall strong seasonal decreases, such as January, generally have a relatively large negative factor.

Q: Can I subtract the birth/death adjustment from the seasonally adjusted over-the-month change to determine what it is adding to employment?

A: No. Birth/death factors are a component of the not seasonally adjusted estimate and therefore are not directly comparable to the seasonally adjusted monthly changes. Instead, the birth/death factor should be assessed in the context of its effect on the not seasonally adjusted estimate.

Q: Can BLS provide an estimate of the contribution of the birth/death adjustment to the seasonally adjusted monthly payroll change?

A: BLS does not calculate an estimate of the seasonally adjusted contribution of the birth/death model. The sample, the imputation of business births using deaths, and the net birth/death model are all necessary components for obtaining an accurate total employment estimate. The components are not seasonally adjusted separately because they do not have any particular economic meaning in and of themselves.

Please read those answers carefully. Many make the mistake of subtracting the birth death revisions from the reported job numbers. It simply does not work that way.

Of interest to me is the answer to the third question. The BLS maintains that the Birth Death revisions make the job reports more accurate than without them. Yet they cannot (or simply will not) tell us exactly how the Birth Death revisions affect the reported monthly job numbers!

It's time to remove the "L" from "BLS".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List