Since 2003, the B/D adjustment has been part and parcel to BLS’ Current Employment Statistics (CES) program, the official measure of US employment.
In brief, the Birth Death adjustment imagines (hypothesizes) how many jobs were created by companies too new and/or too small to participate or be found by CES. The model attempts to create what is perceived as a BLS error at the start of any recovery, when many new jobs are created but missed by BLS.
But in fixing one problem, they created another: At the other end of the cycle — where we are today — the B/D adjustment potentially will hypothesize lots of phantom job creation. That explains the stability in construction and finance jobs in the monthly data. (See Bloomberg’s Why Haven’t Home Construction Jobs Disappeared)
I suspect the misguided attempt to reproduce this modeling error helps explain yesterday’s baffling ADP data.
Ray Stone of Stone & McCarthy Research Associates notes what is the most serious defect of the BDM: “At the same time we recognized the limitations of the BDM. The most serious limitation of the BDM is that it is a time-series model, and as such, does not pick up turning points or inflection points.”
And that is very likely where we are today.
To give you a better idea of how badly the B/D is currently skewing the data, consider these charts below (via Econbrowser). Looking at the changes of the past 3 years, its apparent that the B/D model went from being a modest portion of the CES data to being the increasingly dominant source of reported new jobs over the past 12 months:
chart courtesy of Econbrowser
Indeed, the actual newly created jobs that are measured — and remember, it is a supposed to be a survey measure of new jobs, not a hypothetical model — has dropped radically.
As the chart below shows, the measured portion of CES was near 70% in 2005-06. Now, it has become so increasingly dominated by the hypothesized B/D adjustment, that a mere 20% of the NFP data is truly a measure of the 400,000 participating firms.
chart courtesy of Econbrowser
In October 2007, the BLS data on job creation has ballooned up to 80% imagined, and a mere 20% measured. That is not a formula for accuracy or precision.
This suggests several important things to us about the BLS NFP data:
• It has moved from a model highly reliant on measurement to a model highly reliant on more modeling;
• The amount of job overstatement has gone from moderate to very strong;
• If our analysis is correct, than Economic growth is much weaker than reported;
This is consistent with what we have seen from various sentiment surveys. More robust job creation would moderate the general malaise that seems show up in the University of Michigan’s Consumer Survey Center and the Conference Board survey of consumer attitudes on present economic conditions.
I’ll have more later this week on exactly how much I can deduce the BLS B/D has corrupted the data, and what a more accurate amount of job creation actually might be.
Current Employment Statistics (CES)
U.S. Department of Labor
Bureau of Labor Statistics
Trusting the birth/death model
Econbrowser, November 16, 2007 08:17 AM http://www.econbrowser.com/archives/2007/11/trusting_the_bi.html
Why Haven’t Home Construction Jobs Disappeared
John M. Berry
Bloomberg, July 9 2007