Black Swan Chronicles: Are Job Losses Actually Worse Than Expected?

RebelTraders ^ | 10/16/09

[FromLori]

BTE (Better Than Expected) has been the norm these last times… Pushing the market always higher. Now, how about some WTE (Worse Than Expected)?

The earnings of BAC and of GE this morning have left some bitter taste for the bulls as BAC pulled up a huge loss and GE did not perform as well as could have been expected.

Now it would appear that the “real” unemployment numbers have been actually worse than reported as the BLS (Bureau of Labor Statistics) announced it would have to revise the numbers downward because of issues with the “birth/death model”…

It is not useless to recall that Chuck pointed out several times in his videos the issues with this “model” to explain those BTE employment numbers.

The Bureau of Labor Statistics (BLS) recently announced that they will be making downward benchmark revisions to past monthly nonfarm employment data that casts doubt on the validity of the recent figures as well. As we will explain, it is highly likely that substantially more jobs are now being lost than is currently reported.

The BLS makes annual revisions to the previously announced payroll reports to account for job increases or decreases that were not picked up in the initial data. The main reason for the differences in the preliminary and final reports is the difficulty in getting numbers from the many small and medium sized business and accounting for new startups and firms going out of business.

To make an educated guess at the data that they are missing, the BLS uses something called the ARIMA time series model (commonly called the birth/death model) to estimate employment changes resulting from business births and deaths that are not accounted for by other methods. The model is based on the actual births and deaths over the five prior years.

As you can imagine, when the prior five years encompassed a period of economic expansion, the application of these numbers to a period of recession can result in a substantial overestimation of job changes, and that is evidently what happened recently. The BLS candidly acknowledges this and states that it is “likely to have some difficulty producing reliable estimates at economic turning points or during periods when there are sudden changes in trend.”

In the current instance the BLS announced that preliminary tabulations indicated they would have to reduce the estimate of total nonfarm employment by about 824,000 for the year ended March 31, 2009. On average, therefore, the net change in payrolls for the period was overstated by about 68,000 per month. Interestingly enough, the birth/death adjustment had added about 717,000 jobs during the same period. So it’s apparent that the benchmark revision will more than wipe out the entire amount added by the model. What does this mean for the period following March 31, 2009, which will not be revised until next October? For the six months since March 31st the birth/death adjustment has added 815,000 jobs, an average of 135,000 per month.

Since small and medium sized firms are suffering from severe credit restrictions, they are much more likely to have reduced employment significantly rather to have added that many jobs. That means current monthly job losses may be running as much as 135,000 higher than is currently being reported. While we won’t know the true number for another year, those being laid off will know, and they will be reducing their spending accordingly.

The Fed certainly knows what’s happening and that’s one reason they are promising near-zero interest rates indefinitely.

When we combine the weak job numbers with declining wages, tight credit, record household debt and the impending explosion of home foreclosures, the chances of a sustainable economic recovery looks exceedingly slim.

Yet, for the third time in this decade the stock market is off on another binge not based on reality. Such flights into fantasy always end badly.

[TwelveOfTwenty]

So now we have another expression to come out of this economy, “worse than reported”.

[FromLori]

I know can you believe it what next?

http://www.calculatedriskblog.com/2009/10/florida-unemployment-rate-hits-series.html

[coloradan]

I think the government should halt use of all these models, and simply report the numbers. People sophisticated enough to make use of the numbers are sophisticated enough to make the seasonal adjustments, cost of living adjustments, and birth/death models themselves. These adjustments are simply a way for the government to tinker with the numbers, in other words, to lie.

[Daisyjane69]

ladybug,

I don’t trust ONE word from this administration.

Not one.

[massmike]

save

[andy58-in-nh]

There are so many dirty little secrets about the state of our economy today that one hardly knows where to begin. The reason they are "secrets" is the complicity of the news media, the Federal government, and the virtually state-owned businesses that benefit from the status quo.

Here is just one such hidden fact: banks such as BAC and Citigroup have not been lending money to businesses to expand or to individuals to buy houses or subsidize investment; instead they have lent enormous sums to the Federal Government through debt purchases, and have done so at artificially low interest rates. They have then taken the cash (created by the Treasury printing presses) and, through the giant brokerage houses, speculated on short-term price movements in other banks, in oil, and in gold.

Meanwhile, back on Main Street, job creation is nil (except for in D.C. which is at present the only Boom Town in America), hours worked have declined, housing values continue to drop, and debt service continues to rise even while credit demand tanks. There is no way that this situation can possibly lead to anything like "economic recovery". Instead, all that has occurred is the creation of a giant equity bubble on Wall Street, based largely on the trading of a handful of stocks whose valuations are largely fictional, thanks to the intervention of the Federal Reserve.

[NaughtiusMaximus]

“Where are all the customers’ yachts?” by Fred Shwed.

A timeless classic. I need to dig my old copy out and reread it. This is one of those books that you never lend unless you want to give it away because it gets lent to the next guy who lends it to the next guy who etc.

[NaughtiusMaximus]

I love that tagline!

[Spartan79]

If the numbers will be adjusted again next October, and show a worse-than-expected job loss, expect tabulation and computation problems to delay the release of the numbers until after the elections in November.

[Cooter]

bump

[Sgt_Schultze]

If you go to the BLS page reporting employment here, look down at the Civilian noninstitutional population (employed) line. The differential of employed between August 2009 and September 2009 is 785,000 even though BLS added only 214,000 additionally to the unemployed total in the same period.