Beware the Birth/Death Jobs Hedonics


The always interesting John Crudele of the New York Post argues in a provocative column Thursday that today’s Employment situation release could hurt President Bush.

I don’t think so — not because Job growth is so spectacular — its not; Rather, because the revisions (March 2003 – March 2004) are likely to be upwards. I am no fan of Hedonic adjustments, but they are more likely than not to be positive. So even if the headline number today is awful — or “stinky” as Crudele describes it — the revisions may well act as a presidential parachute of sorts.

What makes Crudele’s columns so intriguing is that he is one of the few (if only) mainstream business journalists who have been calling the BLS out on their Birth/Death adjustment. Here’s the money quote:

“But here’s why the September jobs number could be stinky: Each month the Labor Department plugs into its employment number something called the Birth/Death Adjustment. Explained simply, this adjustment tries to take into account the number of jobs quietly created by companies being born, or jobs lost because companies go out of business.

The government assumes that newborn or dying companies are missed by its surveys.

This adjustment has proven to be the best indicator of monthly job growth so far this year. In fact, it looks suspiciously like these guesses may account for almost all the growth achieved in some months.

Take May, for example. That month the government announced the creation of 192,000 jobs. But it added 195,000 jobs to its count because of its Birth/Death Adjustment calculation. So, all the jobs came from generous assumptions rather than actual surveys.

And when job growth was weak — as it was in July — the government was either adding few jobs for new company formations or deducting jobs because it believed more firms were dying than being created.”

Crudele concurs with our recent critiques of how bad the economists have been this year. He observes that the experts — “who’ve been inexpertly wrong most of this year — think the Labor Department will announce 150,000 new jobs in September . . . But for growth to be that good, or even better, the economy will have had to produce real jobs for a change because there aren’t going to be any beneficial assumptions (a.k.a. “guesses”) coming from the Labor Department.”

We’ll find out soon enough.

Sept. Jobs Numbers Could Hurt Bush White House
By John Crudele
NY Post, October 7, 2004

CES Net Birth/Death Model
Bureau of Labor Statistics
U.S. Department of Labor, 9/3/2004 12:30:45 PM GMT

The Contribution of Establishment Births and Deaths To Employment Growth
James R. Spletzer
Bureau of Labor Statistics, 1998

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Presidential Futures Markets: Spurious Predictive Powers

Last Thursday’s presidential debates surprised many of the 63 million Americans who tuned in by offering substantive policy discussions. The candidates were relatively light on rhetoric and theatrics. That represents an improvement over the style-heavy focus so common most election years. What was also interesting is how the outcome of the debates diverged from the political futures exchanges, which have become the darlings of the economic and political punditocracy.

These exchanges have a host of inherent weaknesses:. They have a very small number of active participants; The dollar amount wagered is tiny; and, and upon closer inspection, these markets have what can only be called a mixed track record. That should be of little surprise to students of the capital markets, as the liquid, cash-rich exchanges offer no better utility in predicting the future. Investors who make financial decisions based on what these “prediction markets” suggest are engaging in risky financial behavior – despite the fact they have become de rigeur among the talking heads.

Prediction Mechanisms

What are the reasons for relying on markets as predictors of the future? I consider the following concepts as key to the belief that futures markets can be used as predictors:

· Price contains all the information one needs.
· Human beings are rational economic players.
· Information distribution is highly efficient.
· Market participants capitalize on that information.
· Markets are free from manipulation.

It should be apparent to most market observers that each of the above items is, at best, only partially true: Investors are hardly unemotional; The markets may be efficient – eventually – but often contain pockets of false or poorly disseminated information; and. And, while it may be difficult to manipulate the giant U.S. equities markets, the diminutive futures exchanges are much more easily influenced.

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