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Beware of Hedonic Adjustments to NFP!
Posted By Barry Ritholtz On May 6, 2005 @ 6:07 pm In Economy | Comments Disabled
I was as taken aback by today’s Non-Farm Payroll number as anyone. But I was curious as to this huge number could be such a surprising outlier, given all the wekaness we have been seeing.
Then, I dug beneath the headlines a bit, and discovered this small little hedonic adjustment to the NFP data: The CES Net Birth/Death Model .
BLS notes " There is an unavoidable lag between an establishment opening for business and its appearing on the sample frame and being available for sampling. Because new firm births generate a portion of employment growth each month, non-sampling methods must be used to estimate this growth." In other words, they estimate the number of jobs created by new firms which the BLS has yet to sample.
Now, I have no idea how accurate or reliable this adjsutment actually is. But out of today’s headline NFP data, out of those 274k jobs, there was a +257k "Birth/Death" adjustment . Of the reported data, 93.8% of the gains have been hedonically adjusted. Note that this is a relatively new process, first introduced in 2000.
I did take the Under,  so perhaps I am just "talking my bet." But if anyone can explain this mnore thoroughly to me, I’d greatly appreciate it . . .
UPDATE MAY 7, 2004: 6:02am
Calculated Risk  has a very thorough explanation as to the impact of this hedonic adjustment:
He exhorts us not to mix: "seasonally adjusted numbers with "not seasonally" adjusted numbers. The actual BLS reported jobs created in April was 1.179 Million (before seasonal adjustment). Of these 1.179 million jobs, 257K came from the birth/death model (or about 22%).
If you follow the link to the birth/death model you will see:
"Note that the the net birth/death figures are not seasonally adjusted, and are applied to not seasonally adjusted monthly employment links to determine the final estimate.
"Finally, when the 1.179 Million jobs is seasonally adjusted you get 274 Thousand headline number.
This suggests that the impactof this hedonic adjustment is far less than initially implied.
CES Birth/Death Model 
Frequently Asked Questions 
SEND IN THE CLOWNS 
Beware the Birth/Death Jobs Hedonics 
Article printed from The Big Picture: http://www.ritholtz.com/blog
URL to article: http://www.ritholtz.com/blog/2005/05/beware-of-hedonic-adjustments-to-nfp/
URLs in this post:
 The CES Net Birth/Death Model: http://www.bls.gov/web/cesbd.htm
 Under,: http://bigpicture.typepad.com/comments/2005/05/nfp_day.html
 Calculated Risk: http://calculatedrisk.blogspot.com/2005/05/bls-employment-birth-death-model.html
 Frequently Asked Questions: http://www.bls.gov/ces/cesbdqa.htm
 SEND IN THE CLOWNS : http://www.financialsense.com/fsu/editorials/kirby/2005/0304.html
 Beware the Birth/Death Jobs Hedonics: http://www.nypost.com/business/19971.htm
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