More on NFP: More Recognition of Disbelief

The WSJ’s Marketbeat reported yesterday that the latest analysis to join our skepticism on NFP is none other than Goldman Sachs:

"Second-guessing government statistics is gaining more credence as time goes by. Greg Ip over at Washington Wire has this post,
detailing how economists at Goldman Sachs believe the Bureau of Labor
Statistics might be overestimating the number of jobs created in new
firms, thus making employment growth look stronger than it is. It’s a
point bloggers such as Barry Ritholtz have made as well."

Let’s take an even closer look at the NFP details then we did on Friday.

The initial read of the April Employment Report was rather punk — Payroll growth at a 2-year low, Unemployment down, but sarting to tick higher — but the devil is always in the details. This report gave Lucifer plenty to play with.

We already mentioned the BLS Net Business Birth/Death Model wholly created a record breaking 317,000 jobs —  the largest amount of monthly jobs ever created from the model — out of thin air. There simply is no justification for it. But we are not alone in that criticism:

John Williams Shadow Stats has an explanation for the unreasonable jump in B/D jobs. “Based
on prior-period revisions, skewed seasonal factors and an enhanced bias
factor, the April data appear to have been massaged so as to avoid
showing a monthly payroll contraction. Reversing the pattern of most
recent months, the Bureau of Labor Statistics (BLS) reported major
downward (instead of upward) revisions to  previously published data,
and seasonal factors became skewed again. Where the monthly
year-to-year  changes in both the seasonally-adjusted and unadjusted
series should be the same, applying the base unadjusted growth rates to
the adjusted series would have reduced the monthly jobs gain from
88,000 to just 32,000.”

Goldman Sach’s Jan Hatzius writesNonfarm Payrolls: Weaker than Reported?
The Labor Department’s ”birth/death model”—which imputes net job
creation by new firms in the monthly nonfarm payroll figures—may
currently be causing a significant overstatement of employment growth.
(1) Conceptually, the danger of overstatement is greatest when the
economy is slowing, as it has in recent quarters. (2) On a seasonally
adjusted basis, employment birth/death adjustments have been unusually
large recently, perhaps because the model “concluded” from the large
upward 2006 benchmark revision that new firms were being created at a
faster rate. (3) The quarterly Census of Employment and Wages (QCEW)
suggests that true employment growth had already started to trail the
official estimates as of Q3 2006. (4) The household survey of
employment has weakened considerably in recent months.

• Q1 GDP growth was 1.3% — a fraction of 2006 GDP — compensation declined 1.5% in Q1; If Housing is in such a horrid slump, and Manfucturing has been slowing, why on Earth does BLS think small businesses created the most jobs ever for a single month in April? How did an unfathomable 49,000 construction jobs get created (via B/D), when the Net Construction jobs actually measured by BLS  — not merely hypothesized — fell 11,000?

Merrill’s David Rosenberg:
“A point to note: fulltime jobs, the key generator of personal income
growth, plunged by 687,000 in April. That was the largest slide since
the economy was knee-deep in recession  in August 2001. Such a decline
has only occurred three times in the history of the Household Survey
going back to 1968.”  Mr. Rosenberg notes that “the employment-to-population ratio sagged to
63% from 63.3%….The last time the employment/population ratio fell
that much in one month was in October 2002, when the Fed was consumed
with deflation fear and was on the precipice of cutting the funds rate
two more times.”

• A friend emails me this:  "For years certain permabulls screamed that the Establishment Survey (CES) understates job growth and the Household Survey (CPS) is a more accurate depiction of the economy.  For April the Household Survey shows a job LOSS of 468k! For 2007 the Household Survey has a net LOSS of 140k jobs. The Household employment adjusted to Payroll methodology (excludes the self-employed and counts each job a multiple-job holder has) fell by 70K."   

• BLS continues to understate the unemployment rate, as it has been doing for most of the past 6 years,  by reducing the ‘pool of available workers’.  BLS reduced the labor force by 392,000 in April.  This kept the Unemployment Rate from jumping higher than 4.5%. The ‘participation rate’ declined to 66% from 66.3%, which is an unusually large monthly decline. That’s 0.3% times 143 million or so workers — instead of rasisng the unemployment rate, we lower the labor participation rate by 429,000 workers.

• BLS continues to overstate actual employmentFrom BLS: “Household survey. The sample is selected to reflect the entire civilian noninstitutional population. Based on responses to a series of questions on work and job search activities, each person 16 years and over in a sample household is classified as employed, unemployed, or not in the labor force. People are classified as employed if they did any work at all as paid employees during the reference week; worked in their own business, profession, or on their own farm; or worked without pay at least 15 hours in a family business or farm.  People are also counted as employed if they were temporarily absent from their jobs because of illness, bad weather, vacation, labor-management disputes, or personal reasons.”

In other words, if you “Worked without pay,” the BLS Household survey considers you gainfully employed.   Beyond absurd . . .

Casey Weldon notes, “Over the last few years, a month-month decline in Self-Employment has become a very RARE occurrence.  The only other month-month decline posted in the last YEAR was in Dec-06.  The number of Self-Employed in the US contracted by (-) 24,000 in April.”

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What's been said:

Discussions found on the web:
  1. Tom C., Stamford,Ct. commented on May 9

    Government statistics are bunk. When they became unreliable and why is the story.

  2. spencer commented on May 9

    Generally the birth-death model is a good adjustment to the data and means that later revisions are smaller. However, it also makes it virtually inherent that the employment data will be late in reporting turning points.

  3. Jay Weinstein commented on May 9

    I so agree with Tom C.–it always drives me crazy at the trading reactions and market babble that these stats generate. No one ever reports on the huge revisions in virtually every statistic that render the original announcements meaningless.

    The only argument is which stat is the worst LOL I vote for the inflation [ex-inflation] calculations.

  4. REW commented on May 9

    BR, this is great, detailed analysis as usual. But it’s moot. Why not spend as much time disecting forward-looking, market-based signals of the economy? Backward looking, seasonally adjusted, continuously revised surveys do not seem to be worth your time.
    I know these stats matter simply because everyone looks at them. As a commentator on the margin, you can help shift attention to more appropriate measures of the economy.

  5. gunthestops commented on May 9

    Since we are talking about statistical BS, does anyone really believe the BLS inflation numbers over the last couple of years? I believe the use of “Hedonics” to adjust inflation models along with other changes made in the mid 90’s by the BLS have skewed the numbers to the point that they are meaningless.

  6. S commented on May 9

    Charles Biderman of TrimTabs wrote letters to Bernanke and Paulson suggesting an improved procedure for reporting job creation. He described the proposal in the the recent article linked below:

  7. Josh commented on May 9

    Just goes to show you why ADP, the nation’s #1 provider of job pay check services is not on the same page as the BLS in terms of job growth. BLS is manipulated. I like Bidderman’s ideas as the information is there, we just have to use it. Maybe when we’re coming out of a recession and that data supports economic growth is when we use it. Not the other way around.

  8. mickslam commented on May 9

    We are wittnessing the complete politicalization of the government by George Bush. Justice Department, Check. BLS, check.

    This is a problem that will take about a decade to undo. And no, no one did it before, at least not to this extent. Not Reagan, not Clinton, nobody.


    BR: Actually, John Williams of Shadow Stats claims the gaming of government data goes back to JFK — and he claims very president did it since then.

    I think Spencer’s comments — that the B/D adjustment is very late in recognizing turns — hits the relevant investment issue

  9. Winston Munn commented on May 9

    October 17, 2004, New York Times Magazine article by writer Ron Suskind, quoting an unnamed aide to George W. Bush:

    “…we create our own reality…”

    Commerce is under the executive branch.

  10. Philippe commented on May 9

    MSDW had the same interrogation on the validity of NFP (see the unemployment a new conodrum Global economic forum)they do not pleade for lower interest rates.
    These indicators are coincident and not leading and few economists try to make a case for lower interest rates on these data only, neglecting the Investment Saving’s curve neglecting the Supply and Demand for money’s curve, neglecting the inflation neglecting the balance of payment (neglecting the total indebtness private and public ).

  11. Tom C., Stamford,Ct. commented on May 9

    Winston- You need to go back a bit. It didn’t begin with the current administration.

  12. ferd mertz commented on May 9

    amazing how the financial establishment can babble endlessly using faulty/cooked data. goldilocks is actually code for stagflation or inflationary recession. maybe the melamine being imported from china into the food supply is causing brain damage!

  13. lewis commented on May 9

    I am dazzled by this amazing academic research compiled to convince me that a government run by bottom feeding scum sucking lawyer-politicians is lying to me. May be the largest documented overkill in history.

    Barry –

    Back to MEW. House sales down, mortgage applications up. And from interest rate roundup “But the March figures were a real whopper …

    * Consumer credit jumped $13.5 billion, versus expectations for a $4 billion gain. The February gain was revised up to $5.6 billion from $3 billion.

    * The March increase equates to 6.7% at a seasonally adjusted annual rate — 9.2% for revolving debt (think credit cards) and 5.2% for nonrevolving debt (auto loans, etc.). Those are some pretty hefty numbers compared to what we’ve seen recently.

    * What’s behind the gains? Tough to say for sure. But it could be that the housing ATM has been shut down. Free-spending Americans, no longer able to count on an endless supply of home equity to liquidate, are once again turning to credit cards to finance spending.”

    I think my case that the MEW feeders are now just bellying up to any old available credit trough is coming true. Next predicted trend – the negative savings rate continues to grow as the addicts pay more at the higher cost credit feeders.


  14. Michael Donnelly commented on May 9

    Whoa, hold on a minute here, sure BLS isn’t perfect, but who was complaining about the B/D model when the revisions were being revised higher for many months in a row ?

    From May 2006 to Jan 2007 the net revision was always higher and by a lot. An average of 60,000 jobs per month.

    So for those 9 months should the B/D model have been raised by 60,000 per month ? If so April 2007 looks pretty reasonable.

    Now I’ll grant you there is no way construction added 49,000 jobs in April, but overall the BLS does a pretty good job.

    Would you prefer they wait 2 additional months until all the surveys trickle into the BLS ?

    I do like the idea of using tax data to provide more real time employment data. Many thanks to S for providing the Charles Biderman of TrimTabs link.

  15. Barry Ritholtz commented on May 9

    I think that was me complaining about it !

  16. MarkTX commented on May 9

    Ahhhhhh Yes!!!

    Unemployment EX-unemployment….

    Now where have we heard that one before?

  17. Cory commented on May 9

    BLS in long form is not Bureau of Labor Statistics, its : (B) UL (L)(S) HIT! C.

  18. Winston Munn commented on May 9

    Politicians have a long a sordid history of influencing tweaks to government statistcs – although it did not start with the present administration, this admininstration has exceeded all past historical levels in ignoring information contrary to their views, from science to yellocake.

    It would therefore be no surprise if they were taking a more active role than past administrations in presenting a happy face
    on economic and financial conditions.

    This type of gimmickry did not start with this administration, but this administration seems to be much more aggressive than others in its use.

    As more information about interventionist activities in the markets, there is this tidbit: Dawn Kopecki – who reported in BusinessWeek Online in a piece titled, Intelligence Czar Can Waive SEC Rules,

    “President George W. Bush has bestowed on his intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations. Notice of the development came in a brief entry in the Federal Register, dated May 5, 2006, that was opaque to the untrained eye.”

    I’m still tryin to figure out how accounting and securities-disclosure obligations of publicly traded companies is tied to “national security”.

  19. John commented on May 9

    Fantastic work, Barry. Really interesting stuff. I mean, we know the government is basically a pack of lying jackals, but this bit lays it all out, nice and neat.

    Unfortunately, it does not matter. Bernanke will keep printing money like a madman, banks will keep loaning it to hedge funds, who will keep goosing the market any time it downticks for more than five minutes.

    All this bad news is going to do is to keep the market from going down. It encourages people to short, which merely provides more fuel for the squeeze bulls.

    The only “being right” is whether you make money. And paying attention to any of this stuff is destined to do nothing but lose you money by the bushel basket. Because it doesn’t matter. The deep pockets rationalize all news as good for stocks, and Bernanke keeps those pockets full to the brim. Weak dollar? Good for exports! Strong dollar? Good for the consumer! Weak economy? Fed cut! Strong economy? Good for earnings! Buy buy buybuybuy! Buy more! Buy a lot!! BUT IT ALLLLLLL!!!!! Whoo-hoooo!!!

    There was a comment on your blog yesterday, about creating debt for export. I think that’s correct and if so, we’re only just getting started with this madness. And it IS madness. But it’s also quite real, and not anywhere close to an end.

    When it finally does end, the global economy is going to completely and utterly collapse, except for China, who will be laughing at all of us. But I wouldn’t look for this until 2009, at the earliest.

    Remember the poster in Fox Mulder’s office? Every hedgie on Wall Street, except for you, Fleck and Kass, has a similar poster. Except above the words I WANT TO BELIEVE is a picture of Bernanke, instead of a UFO. (Although the resemblence is uncanny…) Barry, they WANT to believe in The Good Times That Never End.

    None of this bad news matters. The events of Feb 27 gave that !@#$%^#%&@ing moron of a Fed-hed the excuse he needed to turn the printing presses up to Warp 12. Nobody’s going to stop him, because a market correction means da turr’sts have won.

    My best advice to all who will heed it is to buy every dip, look into farmland in Canada…and study up on how to work it while you’re collecting the money to buy it.

    You have about 18 – 24 months.

  20. J commented on May 9

    By now you know that if you back out government jobs (+25k), noting hat 8,600 of that number was government-related education hiring at the state level (in April?), this leaves the private sector with a sparse add of 63k jobs. But that’s not the point we want to make. We have found something a lot cuter in the report to single out.

    Table A-1 is found here:

    This all comes from the Household Data.
    First, a basic look at April [vs. March]:

    Unemployed 6,801[6,724] Employed 145,786 [146,253] Labor Force 152,587 [152,979]
    Do the math: 6,801 +145,786 = 152,979

    The rate of unemployment is determined by dividing the number of Unemployed (numerator) by the size of the
    Civilian labor force (denominator).

    The numbers in April were 6,801 / 152,587. Thus, the rate was 4.5%.

    The numbers in March were 6,724 /152,979. Thus the rate was 4.4%.

    So, there’s your increase of .1%. Nice and neat.

  21. me commented on May 9

    From Mish:

    “If we counted unemployment the way they do in Europe it would be closer to 8.2%”

  22. Winston Munn commented on May 9

    Is it time to go all silver or gold? I’m partial to silver, as it seems the more undervalued as has more industrial uses.

  23. Winston Munn commented on May 9

    Other than overall government intervention, this really doesn’t pertain to the labor statistics but it seemed worth mentioning anyway. Again, from

    “As I stop to think about it, when J.P. Morgan grows their derivatives book – in 3 out of 4 of the most recent quarters by 5 Trillion increased notional per quarter – we can all sleep tight with good sense of well-being. After all, we do know that – or at least should be aware of, as Jim Willie recently revealed;

    ‘The Bank of Baghdad was cited as a trading pit for JPMorgan last week, where oil funds are actually used to suppress the crude oil price. It is a clearing house for more, a convenient bank without the encumbrance of regulatory oversight, the perfect central bank for the cabal in power. The more sinister overt effect from the war is the invisible gun pointed at the heads of the Persian Gulf nations.’”

    And also this:
    “Once again, let’s consider the words of Mr. Jim Willie,

    ‘The US Federal Reserve is JPMorgan. The Dept of Treasury is Goldman Sachs. The Iron Triangle supports the US Military. These entities do the government’s bidding and execution of programs.'”

    Is the market now about understanding global politics rather than enomonics?

  24. Camille commented on May 9

    I feel it’s most important that the BLS simply report, in detail, how they got their numbers and leave it to the analyst to express their confidence in the value of the end result. I actually fault the reporters/news companies for not commenting on the BLS methods. Readers should be privy to the math behind these numbers and understand there is a degree of subjective manipulation in the background.

    Inflation reports should be viewed with the same skepticism. Ever since we moved to a geometric mean vs an arithmetic mean for reporting inflation the numbers understate very meaningful inflationary spikes. The BLS uses a geometric mean on the ‘substitution principle’, i.e. products subject to price spikes are substituted for cheaper items. Substitution of ground beef for steak as the cost of steak spikes due to feed costs rising doesn’t change the fact that a steak is more expensive. The number should reflect the cost change of a steak. When ground beef gets too expensive we’ll eat mucous I guess. Moreover, many things like gasoline, clean water, energy, have no meaningful low-cost substitutes.

  25. John commented on May 9


    This is all about continuing the party at any and all cost.

    The financial press turns a blind eye for the same reason the entertainment press often does: access. Nobody puts a gun to a reporter’s head and tells them not to make a big fuss about this or that fact. It’s just that the reporter who does so against the wishes of the powers-that-be finds themselves quietly frozen out of the inside track, as do editors who make a habit out of publishing those who go off the reservation. That’s left to the ragsheets, which often grossly exaggerate such facts in order to attract readers.

    So it’s no wonder that the financial press seldom covers the fraud and manipulation in government or corporate figures. The infraction has to be big enough to matter and not condoned by a majority of the players. Right now, embracing bogus government stats and the (supposedly illegal, nudge-nudge wink-wink) game of beat the number mean that the market keeps rallying.

    Once this rigged little game finally collapses, the (provably) worst offenders will find themselves outside the clique (ballast off a sinking ship, y’see), and thus fair game for the f-press.

    Ain’t humanity grand?!

  26. mickslam commented on May 9

    hey Barry,

    There is a huge difference between some guy at “Shadow Stats” saying they’ve been cooking the books and the people at Goldman coming out and openly questioning the numbers put out by the BLS and this being reported by the WSJ.

    I happen to believe some of the Shadowstats theory, but I still believe there is a qualitative difference between what happened in the past and what is happening now. The difference between official reality and what people are feeling in their wallets is larger than at any time in my 40 year life.

  27. Cherry commented on May 9

    Barry, now you believe.
    UE 2001: 4.9
    UE 2002: 5.9
    UE 2003: 6.1
    UE 2004: 5.7
    UE 2005: 5.5
    UE 2006: 5.2

    NEVER has the UE rate gone below 5% and with the growth we have recieved, it is easy to know why.

    BLS is the Neo-Cons next and maybe final fiasco. 6 years of stats will have to be revised and re-done. Personally, the Orwellianism isn’t necessary. We know the economy never boomed but fell into a quiet state of “allrightness”. So the economy isn’t nearly as good as it was in 1999. Neither was the 80’s Neo-Cons. Resorting to Orwellianism to “trick” the masses won’t work in America. We will eventually catch you.

    I don’t understand why it hasn’t boomed considering how much stimulation it has recieved. The rest of the world has. If the US started growing back to boom rates, inflation would force the FED to raise over 6.00% anyway eventually. Matter of fact, it is the “sluggishness” of the US economy during this decade that has saved the world from inflation problems. During the Boom of 72-73, we saw what happened during a mass international boom.

  28. Paul Jones commented on May 10

    We accept the fact that they lie about life and death, war,and other immoralities; yet they are scrupulous when it comes to something like money? No sale.

  29. The Big Picture commented on May 24

    WSJ: Overstated Job Market Strength?

    We have long stated that the official BLS data was a rather artificially optimistic assessment of the actual employment picture. Our thesis, supported by many confirming 3rd party data, points to a bifurcated recovery since the 2001 recession. Indeed, …

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