Some time ago, we retired the Over/Under bet on the monthly NFP. The initial number gets so significantly revised, that the first release of it is nearly pointless.
This week, I was tempted to revive the over/under bet. Given the ongoing loss of manufacturing and construction jobs, the weak housing and auto data, and the very disappointing ADP payroll report, one should expect a very moderate NFP number.
However, as the astute Bill King observes, the past three Aprils have seen a huge accounting sleight of hand known as the Birth/Death adjustment. This is the BLS guesstimate of how many jobs were created but not measured. It is supposed to capture small firms outside of the establishment surveys direct measure. This guesstimate was ramped up in 2001, and has been a point of major confusion ever since.
The B/D adjustment has become very significant. It has had a major impact on BLS Non Farm Payroll total numbers. In 2006, for example, of the 2.26 million new jobs that BLS reports as being created, 964,000 — nearly half (42.6%) — were due Birth/Death adjustments.
For some reason, April is a big month for this statistical twist. We seem to get very strong B/D adds in April, which are then revised downwards.
Here are the recent April B/D adjustments:
April 2005, Preliminary B/D add was 257k. Subsequent revision 206k. NFP = 340k.
April 2004, Prelim B/D add was 270k; Revised to 225k. NFP = 287k.
April 2003, Prelim B/D add was 228k; Revised to 128k. NFP = -48k.
April 2002, Prelim B/B at 66k; Revisid down to 45k. NFP = -83k.
As King observes, "BLS has consistently overstated the Preliminary B/D job creation. After tax, state and other data is available, the number of B/D jobs added have been revised lower."
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The point of this is that a significant upside surprise is quite possible — and if history holds, that strong number will eventually be revised downwards.
Of course, its a wildcard as to what the actual BLS guesstimates for B/D will be. Understanding how the numbers are constructed will give you a better view on what the reality is beneath the released data. What you do with that is up o you . . .
Birth/death +317.
Jeff Miller’s “Dash of Insight” blog, at which Barry is a regular reader and commenter, has just offered an excellent analysis of BLS’ NFP methodology. Miller thoroughly debunks the suggestion that there is some kind of conspiracy or “sleight of hand” going on with the employment numbers.
http://tinyurl.com/278cwv
Reaching pretty deep for that big 88 increase in payrolls. Lots of action this week prior to the number shoring up the dollar and batting down gold and silver.
No, what Jeff says is “trust the black box” because those who operate it know it best.
Is the B/D model a fixed percentage positive variable or does it have mechanisms to refelct negative growth?
Seems to me that a 6-month exponential MA could be used to improve the forecasting ability of the B/D.
Winston Munn, here’s your link to birth/death
http://www.bls.gov/web/cesbd.htm
The following headline was just delivered to my e-mail inbox from Reuters:
U.S. Adds 88,000 jobs in April.
Interesting twist in word choice, is it not? Accurate, but not of much value.
Winston Munn, here’s your link to birth/death
http://www.bls.gov/web/cesbd.htm
Thanks, Neal.
O.K., Neal. This quote then explains the problem.
From: http://www.bls.gov/web/cesbd.htm
“The most significant potential drawback to this or any model-based approach is that time series modeling assumes a predictable continuation of historical patterns and relationships and therefore is likely to have some difficulty producing reliable estimates at economic turning points or during periods when there are sudden changes in trend.”
And it does indeed seem that “The times they are a changin'”.
LIES,DAMN LIES,AND STATISTICS.who can you believe? one thing that i see in the nfp report is that wages did’nt rise as expected (0.2%). this is supposed to be a good thing as it lessens the chance of inflation.”HELLO”,inflation is here to stay,inflation is way over 2-3%,lower/less wages=less consumer spending, etc,etc,etc.raise your hand if you’ve been in a grocery store lately,oh that’s right food and gas don’t count,it only affects the working class.one of these days wall street/fed will be picking their teeth up off the floor where the “consumer” (joe six pack,70% of the economy)sucker punched them in the mouth.that is if china does’nt kick us in the nuts first.
and from the 88k almost 30% are government jobs…….(25k)
Man, the BLS is having a REAL problem finding the construction cuts. Obviously we wonder if that even have the ability to find them, but the slowness is absurd. Even ADP had a higher elevation of res cuts. It isn’t just illegals either. The stated numbers are still at 2005 levels which isn’t likely anymore.
FWIW, either the ISM or the payroll suppliers were way off. Somebody is gonna have to revise(yes, the ISM does revise).