So, the jobs number last week was better than expected…
Was it?
David Rosenberg nails it when he says (bold emphasis mine):
All this excitement over a 345,000 payroll decline tells us that we have been in a recession for so long now that we have all forgotten what an economic expansion looks like. A 345,000 job slide is double what we were experiencing before the Lehman collapse and is worse than the worst months in each of the last two recessions.
Admittedly, with the help of a 220,000 boost from the Birth-Death model (compared with 174,000 in May 2007 — at the peak of the cycle), the nonfarm data was better than consensus estimates and not nearly as bad as what we had been seeing through most of this year when the declines were hovering around 700,000 per month. Then again, the economy is no longer contracting at a 6% annual rate, so why should anyone really be expecting detonating job losses any more? The fact that the employment data are “less bad” than a depression-style experience misses the point.
So what is this birth/death thing?
In 2008, the CES sample includes about 150,000 businesses and government agencies drawn from a sampling frame of Unemployment Insurance tax accounts which cover approximately 390,000 individual worksites. The active CES sample includes approximately one-third of all nonfarm payroll workers. The sample-based estimates are adjusted each month by a statistical model designed to reduce a primary source of non-sampling error which is the inability of the sample to capture, on a timely basis, employment growth generated by new business formations.
There is an unavoidable lag between an establishment opening for business and its appearing on the sample frame and being available for sampling. Because new firm births generate a portion of employment growth each month, non-sampling methods must be used to estimate this growth.
Earlier research indicated that while both the business birth and death portions of total employment are generally significant, the net contribution is relatively small and stable. To account for this net birth/death portion of total employment, BLS uses an estimation procedure with two components: the first component excludes employment losses from business deaths from sample-based estimation in order to offset the missing employment gains from business births.
This is incorporated into the sample-based estimate procedure by simply not reflecting sample units going out of business, but imputing to them the same trend as the other firms in the sample. This step accounts for most of the net birth/death employment.
The second component is an ARIMA time series model designed to estimate the residual net birth/death employment not accounted for by the imputation. The historical time series used to create and test the ARIMA model was derived from the UI universe micro level database, and reflects the actual residual net of births and deaths over the past five years.
The net birth/death model component figures are unique to each month and exhibit a seasonal pattern that can result in negative adjustments in some months. These models do not attempt to correct for any other potential error sources in the CES estimates such as sampling error or design limitations.
Note that the net birth/death figures are not seasonally adjusted, and are applied to the not seasonally adjusted monthly employment estimates to derive the final CES employment estimates.
Here is the last year in chart form:
What I have a very hard time believing is that we are creating more new business jobs now in such restricted credit environment that we were last April before the recession hit. I could under stand a flat number as opposed to a negative one and even have it explained away as “so many business have closed doors that more of what is left are the stronger business models”. That may or may not be true but at least we could look at that and find it within the realm of reality.
I cannot see how we are creating hundreds of thousand of more new businesses jobs than we are losing each month right now given what everyone is seeing out there. We are they coming from? Unemployment ranks are still climbing, initial claims climb each week and people are spending more time on unemployment. Credit markets for established businesses are difficult much less those for new business. The typical avenue for starting new business, tapping home equity, has all but evaporated so, where is the money coming from for all these news businesses?
In order for 200k plus news business jobs to be created IN EXCESS of those closing, the businesses being created are not housewives making cookies in their kitchens to sell over the internet (nothing wrong with that, just not going to move this particular needle). These are moderate sized endevours.
Anyone have any empirical evidence of one?
The big tell here is what happens going forward. April and May are seasonably better and the birth/death numbers are not seasonably adjusted. So, if the non-farm number remain about 350k each month and birth/death returns to the typical essentially flat summer numbers, that means we should see losses back into the 500k range in a month or so.
If the birth/death does not experience a dramatic summer/fall decline like it has every year this decade, then we’ll really have to start to wonder if this information is beginning to be massaged for lack of a better word..
Birth/death historical information
Disclosure (“none” means no position):