Spraying Pesticide On Those Green Shoots

TW: I had never heard of the Bureau of Labor Statistics "Birth/Death" model until maybe a year or so ago. It is one of those arcane inputs into our economic stats that should interest economists and sophisticated investors but not your normal citizen. The model has nothing to do with folks living or dying but with the "birth/death" of new businesses.

The model has gained notoriety because of the above, where as you can see the BLS keeps plugging in new jobs to reflect "new businesses" at the same rate as they have since 2004. The plugs are not immaterial they were over 200K in May and are over 700K cumulatively since February.

Recall on Friday most of the headlines said something to the effect of "jobs losses less than forecast" because 300K+ were lost instead of 500K+ or just about the amount of the BLS "birth/death" adjustment. The jobs' numbers drive markets but is the jobs number accurate.

Intuitively one would think the "birth/death" number should be worse this year than say 2005 when the economy was growing but that is not the case, perhaps it should even be negative. I would feel much better if this were a long-standing model input that has been tweaked to reflect business cycles over decades, but no. As I learned from Ritholtz it was created by...W. Bush in 2001 because he thought the BLS was under-reporting new jobs..at which point I am like "oh shit". Assessing the actual import of this model is far beyond my expertise but others are voicing concern as well. Something to keep in mind, if the model if off a negative adjustment will be forthcoming at some point or else we are just living in gagaland.

From Barry Ritholz' Big Picture blog:

"A quick refresher on the Birth Death adjustment: In 2001, the Bush administration directed the BLS to compensate for the tendency of the Establishment Survey to miss new business formation and the impact on employment. Previously, BLS tended to under report new jobs in the beginning of a a cycle turn. What the new B/D Adjustment series did was take new incorporation filings per state, and deduce from them that new jobs were being created. (That took effect around 2003).

This improved somewhat the ability to capture new jobs at the start of the cycle. But the flaw in the adjustment was that the model radically overstated job creation at the end of the cycle. Say a firm goes out of business, or lays off 100s of workers. They form new shops, incorporating these start ups. According to the BLS, that is job creation.

But in reality, a steady paycheck with benefits has now been transformed into a start up with none of the above. And as we know, 90% of all new businesses eventually fail.

How misleading is the BD adjustment at the end of the cycle? Consider that in 2007, 75% of the BLS newly created jobs were due to the B/D adjustment. That did a nice job masking the actual problems beneath the surface."