07 November 2014

Non-Farm Payrolls Report for October - Birth Death Model to the Rescue

As you may have already heard there was a 'miss' in the new jobs added in the October Non-Farm Payrolls Report.

There were some other troubling aspects in that report that I will discuss in the stock commentary tonight, but I did wish to point out an outlier in the way in which the number was constructed.

As you can see in the first chart below, the number of jobs added in the BLS Birth-Death Model was higher than the usual number we have seen for the past six years. 

This is certainly not the worst outlier.  As you can see, April 2008 was a banner month for imaginary jobs, with which to welcome the new President.

This number is the estimate of how many jobs were added or subtracted by new or small businesses not captured in ordinary reporting.   In my mind, it is such a creature of estimation as to just be a 'plug.'

In the second chart I show the 'headline number' of jobs added with the seasonalized number of imaginary jobs from the Birth Death model subtracted out.

As a reminder, the month to month variations in the headline number are of primary interest to politicians and the stock markets, and will likely be changed and revised quite a bit in the future, when no one seems to care. A more meaningful number is the twelve month moving average. But that gives less opportunity to game stocks and grab headlines.

And as an aside, the headline unemployment rate, which continued 'to improve' is a disgraceful indicator that ought to be ashamed to go out in public, as it so grossly misstates the underlying economic reality of things.  It is like the Dow Jones Industrial Average of economic indicators.  They both throw out all that they define as 'losers' to make their numbers look better.

It does add some volatility which is why I think that the Birth-Death estimate is just a plug created by the BLS statisticians.

And in this report, it appears they were very generous in assuming the number of jobs that were added.  I wonder how they justify this?