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| Some Comments on the "Birth/Death" Controversy Surrounding US Employment Data - May. 14, 2005 |
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Foreword
(NOTE: The "Foreword," "Introduction" and "Concluding Comments" sections were written by Doug Gillespie.)
Last Wednesday (5/11), I received an e-mail from a client regarding a Morgan Stanley research article he had just read. The piece was entitled, "'Birth/Death' Confusion Redux." It was authored by Ted Wieseman and appeared in Morgan Stanley's regular publication, Global Economic Forum (edition of May 11th).
In his article, Mr. Wieseman was a bit critical of those who think there might be a problem (or even two) with the so-called "Birth/Death" adjustments the US Labor Department uses in computing its monthly payroll employment numbers. To wit:
"Spring is in the air, which in addition to warmer weather now seems to mean conspiracy theories running amok about the Bureau of Labor Statistics' 'birth/death' adjustment to the monthly payroll figures. ..."
While the client who sent me the e-mail knows we are not part of the "black helicopter" crowd, he also knows that from time to time, we have expressed a least a modicum of skepticism about the US employment numbers, and more specifically, about the methodology used in computing them. Thus, he wondered if we might have some thoughts about Mr. Wieseman's article.
I forwarded the request to my friend and associate, John Williams. I believe John's response will be of genuine interest to anyone who has had questions or concerns (conspiratorial or other) about the DOL's "Birth/Death" adjustments.
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Introduction
Last fall, Gillespie Research Associates entered into a joint venture with John Williams. This gave birth to an affiliated but independent research operation that John oversees under the umbrella, John Williams' Shadow Government Statistics.
I am absolutely delighted with the results to date. They have broadened the overall capabilities of Gillespie Research, and there are some major, new developments about to come off the drawing board. To learn more about this, please be sure to read the "Concluding Comments" section at the end.
John Williams is an exceptionally fine business economist. However, his talents go well beyond this. When it comes to the history of the significant changes the government has made over the years in the way it computes its key economic data, John is one of the more knowledgeable people around. He excels at understanding what these changes have done to the quality and accuracy of the numbers. In addition, though, John has a great ability to explain in cogent terms the various consequences.
Those of you who are reading this who know John and me also know that we do not believe the numerous changes over the years have improved anything. Quite to the contrary!
What follows is a response to a recent piece of Morgan Stanley research with which we may at least modestly be at odds. This said, I want to state --emphatically -- that both John and I have great respect for the work of Stephen Roach, Morgan Stanley's chief economist. Within broker-dealerland, Steve is, regrettably, one of the very, very few people who truly "get it." And in our view, he gets it for all the right reasons.
For those of you who have not read the article to which John Williams is responding, we strongly suggest you do. It can be found on Morgan Stanley's website, but for convenience, it is referenced, with a link, in the "Concluding Comments" section below.
Since John's response was not written to be what I have turned it into, it is by no means all-inclusive. On the other hand, I think it provides valuable insights regarding a hot topic that is surrounded by a more than a little controversy.
In addition, I have provided the links to some of John's other work that I think will help fill in some of the blanks, and which I know readers will find of material interest and benefit. Again, the references/links are found in the "Concluding Comments" section.
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John Williams Responds
For continuity's sake:
(1) Last Wednesday (5/11), I received an e-mail from a client. This e-mail contained a link to a Morgan Stanley research piece. The e-mail asked, "Will John comment on this article?"
(2) The Morgan Stanley article (also dated 5/11 and contained in the firm's Global Economic Forum publication) was written by Ted Wieseman. It was entitled, "'Birth/Death' Confusion Redux," and in part, its preamble stated:
"Spring is in the air, which in addition to warmer weather now seems to mean conspiracy theories running amok about the Bureau of Labor Statistics' 'birth/death' adjustment to the monthly payroll figures. ..."
JOHN'S RESPONSE:
There is no conspiracy theory in this matter. What has evolved and is going on is well documented by the Bureau of Labor Statistics.
I also have had first-hand experience in discussing the theories behind, and the changes made to, the bias-factor process as the system evolved, going back to the introduction of the precursor to the current concept in the years following the double-dip recession of the early 1980s. I also refer you to the material written in the Shadow Government Statistics background piece on employment. [See "Concluding Comments" section.]
Here are the basics. Jobs growth was underestimated coming out of the double-dip recession, and that led to a revamping of reporting biases so as to account for jobs created by start-up ventures that were missed in regular BLS surveying.
There is some justification for adding an upside bias to the surveying during periods of strong economic growth, but even BLS economists acknowledged that the use of bias factors is questionable during times of slow growth or recession.
The new bias factors in the 1980s were just plug numbers and were recast every quarter or so. But generally, they were little changed on a month-to-month basis and were added into the unadjusted data.
Aside from serious sampling flaws in the payroll survey and its annual benchmarking, the recent move from “Bias Factors” to a “Birth/Death” model has
made the monthly reporting unnecessarily volatile. If the payroll data were
properly seasonally adjusted, monthly biases in the reported data should not
be predictable, but they are.
The current net annual birth/death factor is running about +900,000, in line with historic annual net bias factors. What the overly sophisticated and nearly worthless (in terms of statistical significance) models accomplished was to provide big monthly swings to the biases, and they enabled the BLS to justify the previous gut-instant plug factors with impressive looking statistics.
As a quick aside, in terms of broad results, three of the last four benchmarks revisions have been to the downside, and that does not account for multiple changes. For example, the last regular seasonally-adjusted payroll level of April 2002 was revised downward by 523,000 in May 2002, and then again by 265,000 in May 2003, for a total downward revision of 688,000 due to benchmarking.
To see the current birth/death problems, consider the actual monthly bias
changes as used, where they swung from +66,000 in December 2004, to -280,000
in January 2005, to +100,000 in February. While such changes are added to the
unadjusted data, the overall seasonal factors are reasonably small on a base
of 130,000,000 or so. As a result, a swing of +380,000 jobs in the unadjusted January to February numbers from “without bias” to “with bias” ends up with a bias shift of similar size in the seasonally adjusted numbers. Accordingly, as predicted by Shadow Government Statistics, the February jobs change was an upside surprise to the markets, as January had been a downside surprise. This pattern has been consistent since the new models have been in use, and again, should not be detectable or predictable if the BLS system were in balance.
As to conspiracy, I think the markets are just disquieted by the realization the last highly touted payroll gain was little more than the “guesstimated” -- the model results are really no better than that -- plug factor added to survey data. What the markets have not recognized is that most recent reporting, in terms of statistical significance (confidence intervals published by the BLS) has not been distinguishable from no growth.
The markets read much too much significance into the monthly swings!
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Concluding Comments
Sometime over the next few weeks, John Williams and I will be communicating some rather important developments relating to our joint research activities. We feel strongly that these will further enhance our ability to deliver straightforward, timely and intellectually honest economic and financial-market research to our clients -- information absolutely essential to people's economic and investment well-being.
If you would like to be apprised directly of this material when we release it, please use the "Contact Us" link of John's website to provide us with at least your e-mail address. If you are willing to leave a name behind, this would be quite helpful. Databases are a good deal more accurate and efficient to use when e-mail addresses are matched with name entries. Or if you wish, you may e-mail me the information at: drgillespiesr@aol.com.
In addition, John will be publishing a special paper on the federal budget deficit. This work will not be for the faint of heart. However, it is still better to know the truth about this exceptionally disquieting area of the country's financial affairs. A complimentary copy will automatically be sent to everyone leaving behind an e-mail address. Again, simply use the "Contact Us" link of John's website, or e-mail it to me at: drgillespiesr@aol.com.
Within the context of the birth/death material contained in the above article, readers will find both of the following articles written by John to be of interest and benefit. The links provided will take your directly to the articles on John's website:
"Employment and Unemployment Reporting"
"Government Economic Reports: Things You've Suspected but Were Afraid to Ask!"
Finally, you may reach the Morgan Stanley article authored by Ted Wieseman at: "'Birth/Death' Confusion Redux."
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