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Thursday December 17, 2009 - 23:03:47 GMT
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Birth and Death in Non Farm Payrolls
Birth and Death in Non Farm Payrolls
The Non Farm Payrolls (NFP) is the most influential American economic
statistic. In tracking the formation and destruction of employment in
the United States the NFP provides a reliable view of the future course
of the economy. If the United States cannot generate jobs to replace
the more than seven million lost since the beginning of the recession
then no predictions based on returning consumer spending will be
accurate. If the consumer economy does not revive, there will be no
real economic recovery.
The employment data of the NFP is collected from a survey of about
150,000 businesses and government agencies employers called the
'establishment surveyā. The questions ask for a record of hiring and
firings. However, not every solicited company answers the survey. Some
firms have folded and some never bother to reply. The Bureau of Labor
Statistics (BLS) estimates the change in employment at the firms that
do not respond; they also predict the number of firms that have gone
out of business and the number of new firms created. Their estimates
are based on statistical models that draw on historical data.
Statisticians normally deal with the problem of non-respondents, at
least for simple questions, by assuming their answers to be reflective
of the respondents. If 60% of respondents preferred one election
candidate, the surveyors posit that same percentage among those who did
The assumption that non answering firms will have hired and fired in
similar percentages to the responding companies is similar to the BLS
in the Non Farm survey. āThe first component excludes employment losses
from business deaths from sample-based estimationā¦to offset the missing
employment gains from business birthsā *. āThe second component ā¦ (is)
designed to estimate the residual employment not accounted for by the
imputationā, that is to compare the estimates to actual numbers from
state unemployment insurance statistics. These actual job numbers are
available at a several months delay, so the initial NFP release
contains an educated guess of jobs lost and created by failed and new
found firms. In the past the estimate had compared well to the actual
numbers. āEarlier research indicatedā¦that the net contribution (of
jobs) is relatively stableā. When the unemployment insurance numbers
were compared to the estimates from the BLS model, as is done once a
year and included in the January statistics, no notable discrepancies
were discovered. This is the benchmark or ābirth/death adjustmentā.
However, something happened to the accuracy of the model in 2008. The
estimates of jobs created proved to be wildly over optimistic. Last
year these adjustments subtracted several hundred thousand jobs. And in
January this year 356,000 jobs were estimated to have been lost to
failed companies and that is what produced the record loss of 741,000
jobs in that month.
The culprits for this underestimate of job losses are quite
likely the recession and the financial crisis. Economic studies have
noted that financial and banking downturns produce much slower and
weaker recoveries than business cycle recessions. The credit crunch has
been particularly hard on small business. It is likely that new company
formation and hiring is much weaker in this recession than in prior
recessions. The BLS job creation model was not accurate in 2008 and may
have similar problems in 2009.
The BLS will make this birth/death revision to the jobs statistics in
February with the January NFP report. According to the BLS 824,000 jobs
are likely to be subtracted from those reported to have been created
over the prior twelve months **. That is an average loss of 69,000 jobs
per month that were not created, jobs that never existed.
But to the media, the stock market, job seekers and consumers
those jobs are real and that pace of employment improvement is
incorporated into their economic view. The actual performance numbers
of the economy, consumer expenditures, home purchases, debt retirement
and other measures are founded in part on estimates of the economic
future. Those estimates may be partly based on erroneous job creation
and will have to be revised when the jobs numbers are altered.
The picture of the economy portrayed by the jobs report over the past
year has been one of gradual but steady improvement. From a loss of
741,000 jobs in January 2009, the numbers have gotten a little better
each month, -303,000 in May and only -11,000 in November. It appears
that the worst of the job losses are over and that the economy may even
have added jobs in November. This is quite unlikely to be true. Or at
least the pace of improvement has been far slower than given so far in
United States total household and non-profit wealth rose by $2.67
trillion in the third quarter, primarily because of the tremendous gain
in the equity averages since March, and a small rise in home values. As
noted earlier, the equity averages are looking at the jobs improvement
as one indicator, perhaps the most important one on which to posit a
recovery in consumer spending. The feedback loop for equities runs
through employment. If job creation has been considerably worse than
portrayed then some of the underpinning of the equity markets, and the
improvement in household wealth is taken away. If folks are once again
feeling poorer, assuming the equities fall or stagnate, then quite
possibly the projected consumer spending increases will be harmed or
In comparison, the ADP report reached its low in March 2009 with a loss
of 736,000 jobs. In November it recorded a loss of 169,000, a 77%
improvement. The NFP was at its low in January at -741,000. The -11,000
in November reading represents a 98.5% improvement over the January. At
the same 77% improvement as the ADP the November NFP would have been
Since the last adjustment was applied to January of this year
the economy has lost 3,337,000 jobs according to the current Non Farm
Payrolls statistics. If we assume that the December and January numbers
are flat or even slightly positive, as would seem possible given the
trend, then the -824,000 preliminary estimate of the birth/death
adjustment would mean that job losses during the year were close to 20%
higher than estimated.
This is not just a statistical adjustment; it is a number large enough
to affect employers and their hiring plans, equity, commodity and bond
markets, consumers and job seekers alike. It is not a comfortable
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