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?

Note to Mish: The BLS Added About 145,897 Imaginary Jobs to the Non-Farm Payrolls Headline Number

I like Mish Shedlock. He has intellectual integrity, and even when we occasionally disagree, as I recall over the inevitability of deflation and some of its particular consequences and manifestations, I listen to his arguments carefully. He draws conclusions that are difficult to fault. Most of the time we seem to be in agreement.

In his most recent blog, he indirectly poses an interesting question.

"Hidden beneath the surface the BLS Black Box - Birth Death Model added 145,000 jobs. However, as I have pointed out many times before, the Birth/Death numbers cannot be subtracted straight up to get a raw number. It contributed to this month's employment total for sure, but the BLS will not disclose by how much."

Mish Shedlock, Jobs Decrease by 125,000

Here are the Imaginary Jobs added to the Non Farm Payrolls from the Birth Death Model of the BLS. As Mish reminds us, (thank you Mish. I have been nagging bloggers about this for years), the Imaginary Jobs are added to the unadjusted payroll numbers, which are dramatically impacted by the seasonal adjustments, which are sometimes quite significant.



I include this second chart show the Birth - Death numbers over time to show the historical trend. It is remarkable how 'regular' this number has been over the past six years despite an epic recession that devastated small businesses, which is purportedly what this model tracks.



Here is a visual depiction of the Seasonally Adjusted and the Unadjusted Non-Farm Payroll Numbers. As you can see, the adjustment is sometimes very significant. Remember, the Birth Death imaginary jobs are added to the unadjusted number, which is indicated in maroon on this chart.



So obviously one can calculate the 'seasonality factor' using a simple formula

Seasonality Factor (SF) = Seasonally Adjusted Number (SA) / Non-Seasonally Adjusted Number (NSA)

I do this each month in the Payrolls Spreadsheet that I maintain. I like to see if the BLS changes its calculations and assumptions over time, especially when they do major revisions.

And although I have never shown it in this blog before, it is relatively easy to add a few lines to account for the net impact of the Imaginary numbers on the Headline Number.

And so here it is:



It seems counterintuitive that the adjustment is so slight, given the big difference between the net SA and NSA headline numbers as shown in Figure 3. But this is how it is. The reason for this is that the gross input numbers are very large, and so even small deviations from month to month can appear quite large on the net of it. But since the Seasonality Factor is a ratio, it does not have to fluctuate much to have a large impact on the nominal net changes.

The spreadsheet also contains a calculation showing what the numbers would be without the Imaginary Jobs numbers added at all. This month it would have been a loss of 270,897.



One *might* conclude that without the temporary Census jobs and the Imaginary Jobs from non-existent small businesses consisting largely of unemployed people turned consultant, there has been no recovery in net job creation.

This is most likely because of the Fed's and Treasury's policy errors in flooding the banks with largesse to cover their fraudulent insolvency, while neglecting, if not screwing, the public and consumers with one faulty economic prescription after another.

Benny is no Keynesian. If John Maynard. could come back and see what they are doing in his name, I don't think he would be able to stop throwing up. Ohh, bad visual.

A faithful servant of the big banks and corporations, the American version of the kereitsu crony capitalism, I think he's turning Japanese. Timmy, Larry, Volcker and Obama are the Night Pandas, amusing the world with their economic antics while Asia eats their lunch. Disclosure: Timmy is Wee Man, Summers is Preston Lacy, Volcker is Steve-0 when he can stay awake, and of course Obama is Johnny Knoxville.

(All together now.) The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustained recovery.