January Employment Report Preview
As usual, I have a monthly comment on the employment situation. This month's report is especially tricky, since the BLS will incorporate "benchmark revisions" to prior data.
Anything about revisions causes most observers to cringe. The average person just wonders why they couldn't get it right the first time. The conspiracy buffs see revisions as evidence of data manipulation. Since many people are ready to believe that the US government is in an Orwellian mode, this is a message that resonates. Those who know nothing about the actual operation of government seem to think that the BLS switches allegiance whenever there is an election. George W's picture is taken down, and Obama's is put up. I have been trying for several years to educate readers about which agencies spin, and which do not. The BLS is among those least subject to political pressure.
I recently participated in a new survey of economic bloggers. I have high hopes for this approach or I would not spend time on it. My own take on the first results is that it tells us more about the economic bloggers than it does about the economy. They are extremely pessimistic on economic prospects, much more so than surveys of economists. They think that (for some reason) things are much worse than official statistics indicate. The background info seems to suggest that Republican, Democratic, and Libertarian parties are all about equally represented, with a huge number of "independents." That is an eyebrow raiser!
Why Revisions? Why Benchmarking?
The BLS attempts to report timely data about the employment situation, even though many businesses do not respond to the survey. As more data comes in, they add the information to the results. They also do a standard adjustment for seasonality. It is a system, not discretionary. When new data comes in, the seasonal results are recalculated. This is another adjustment.
It is a very standard and mechanical process. The commentators who impute some dark motivation to this are just ignorant about government. Those who think they can "guess" the pattern of revisions need a model relating to non-respondents or changes in seasonality. Most are just guessing, or making an inference from the last couple of months. They need to read a book covering the "law of small numbers"!
It is Keeping Score
Measuring employment changes may be guesswork at the time of the original estimate, but eventually we know the truth. We know it about nine months later when the Feds reconcile the state unemployment data. No business pays unemployment insurance on phantom jobs, so we can expect this to be a good count.
Why can't the BLS do this faster? I do not know. At least they do it eventually. Each year the BLS makes a "benchmark adjustment" by comparing actual counts to their original forecasts and reconciling discrepancies.
It is only fair to note that the vocal BLS critics — people like Ritholtz, Abelson, and Mish — do not do any benchmarking of their own. They criticized the BLS and their methods for many years. When the actual data proved them to be completely wrong there was no 'fessing up. They were wrong for many years, but still pretend otherwise.
In the last year the BLS noted that their method (finally) broke down. Here at "A Dash" we go by data, not by any pre-conceived opinion. When the BLS was correct, we noted that. More recently we have emphasized the breakdown in their method of estimating job creation.
The Benchmark Revisions
I am going to state this a simply as possible. Most critics focus upon the birth/death adjustment aspect of the BLS process. They look at raw data, and ignore all of the warnings and explanations about seasonality, not adding these numbers to the monthly result, etc.
This is a big mistake — a blunder. It would not pass muster in a peer-reviewed journal or a court case.
So Bloomberg's article – -nice graphics, wrong data — misses the point.
Barry Ritholtz's assertion about the B/D model and the business cycle is a mistake because he is asking the wrong question. Most of the implied job creation comes from the imputation step, something that he never discusses.
Both sources err by looking only at only one part of the process — and the part that is less important — the birth/death adjustment. They are missing the "imputation step" which is much more important.
The birth/death adjustment was never intended to capture cyclical behavior. It was a time series geared to the residual job creation after the "imputation step" did the heavy lifting, and has historically captured
For emphasis – -and I have tried to alert many sources —
Anyone who does not understand and discuss the "imputation step" as part of the BLS job creation process is not a true expert. You should ignore that source.
Our Own Estimates
As regular readers know, I am not a fan of the current BLS estimates. While it may seem like hairsplitting to disagree with other critics for a different reason, I think it is an important distinction.
Each month we ask the question, "What change in payroll employment
would be consistent with other economic data from the same time period
(the middle of the prior month)?
This is not a forecast, per se, since we do not posit any
causal relationship among these variables. They are all concomitant
indicators of economic activity.
- We use the four-week moving average of initial unemployment
culminating in the week of the employment survey. This is the best
direct indicator of new lob losses. This has improved in the last
three months to a loss of 447K. Note that today's increase to 480K is not within the survey period for the monthly report. Last week we noted a blip in the other direction.
- We look at the University of Michigan sentiment survey,
which we find to be more useful than the Conference Board's sentiment
index. Michigan uses a panel, where some families are carried over
from month to month. This is a good technique. Sentiment is
influenced by employment. When people have lost jobs, or are worried
about losing jobs, it shows up in sentiment. It is a good concurrent
indicator. The Michigan index is now at 74.4, continuing a rebound.
- We us the ISM manufacturing index, which surged to 58.4 from 55.9 last month. This is strongly bullish for the overall
Our long-term record has been pretty good, especially when compared
to the final revised data. This makes sense because our model was
derived from the final data. In recent months we have been too
bearish. The BLS benchmark revisions suggest that we have been much
better than first thought. I am working on a comparison with the final
This month, our estimate is for a slight job gain of about 5000.
It is always interesting to compare the job forecasts from different
sources. We follow several because of the interesting and widely
varying methods they use. A wise interpretation would be to consider
all of these disparate sources of information.
ADP has proprietary data because of its payroll management business.
ADP sees losses of 22K. This estimate does not
include government jobs.
WANTED Technologies refuses to estimate this month because of the benchmark revisions. I disagree. This is the wrong attitude. The benchmark revision should be encouraged for reasons noted above. The estimate of the monthly change is still very relevant.
Briefing.com cites the consensus as a gain of 15K
and their own forecast is a loss of 25K.
All of these sources are valuable. The 90% confidence interval on
the BLS estimate, something that no mainstream media sources report, is
+/- 100K or so. And that is after revisions and benchmarking. It is a
survey — a good one — but it has an error band.
The report will include a massive benchmark revision for the prior year — a reduction of jobs of over 800,000. There will be new birth/death factors and new seasonal adjustments. Since the revisions only go back to March of 2009 (the last available data), there may be additional revisions for recent months. This would bring the entire series much closer to the monthly forecasts which I have published.
It will be a field day for pundits, most of whom will focus on the benchmark revision — something everyone has known and talked about for months. It is "old news" but will probably not be treated that way.
Meanwhile, our assessment is that the jobs picture continues to improve, but there is a long road ahead. The evidence is that the engine of job creation was broken during the credit crunch. As yet, there is no evidence of a change.
We will get some read data in a few weeks with the next round of the actual state employment data. That information is not a forecast. It is not a survey. It is not a model.
The data will be old, but relevant. Stay tuned.