In brief, the Birth Death adjustment imagines (hypothesizes) how many jobs were created by companies too new and/or too small to be found by CES. The model attempts to create what is perceived as a BLS error at the start of any recovery, when many new jobs are created but missed by BLS.

But in fixing one problem, they created another: At the other end of the cycle -- where we are today -- the B/D adjustment potentially will hypothesize lots of phantom job creation. That explains the stability in construction and finance jobs in the monthly data. (See Bloomberg's Why Haven't Home Construction Jobs Disappeared).

I suspect the misguided attempt to reproduce this modeling error helps explain Wednesday's baffling ADP data.

Ray Stone of Stone & McCarthy Research Associates notes what is the most serious defect of the BDM: At the same time we recognized the limitations of the BDM. The most serious limitation of the BDM is that it is a time-series model, and as such, does not pick up turning points or inflection points.

And that is very likely where we may be today.

To give you a better idea of how badly the B/D is currently skewing the data, consider these charts below (via Econbrowser's Trusting the birth/death model). Looking at the changes of the past 3 years, the B/D model went from being a small portion of the survey to the dominant source of new jobs over the past 12 months:

chart courtesy of Econbrowser

Indeed, the actual newly created jobs that are measured -- and remember, it is supposed to be a survey measure of new jobs, not a hypothetical model -- have radically dropped.

As the chart below shows, the measured portion of CES was near 70% in 2005-06. Now, it has become so increasingly dominated by the hypothesized B/D adjustment, that a mere 20% of the NFP data is truly a measure of the 400,000 participating firms.

chart courtesy of Econbrowser

In October 2007, the BLS data on job creation has ballooned up to 80% imagined, and a mere 20% measured. That is not a formula for accuracy or precision.

This suggests several important things to us about the BLS NFP data:

• It has moved from a model highly reliant on measurement to a model highly reliant on more modeling;

• The amount of job overstatement has gone from moderate to very strong;

• If our analysis is correct, then economic growth is much weaker than reported;

This is consistent with what we have seen from various sentiment surveys. More robust job creation would moderate the general malaise that seems show up in the University of Michigan's Consumer Survey Center and the Conference Board survey of consumer attitudes on present economic conditions.

~~~

I'll have more later this week on exactly how much I can deduce the BLS B/D has corrupted the data, and what a more accurate amount of job creation actually might be.

Sources:

Current Employment Statistics (CES)
U.S. Department of Labor
Bureau of Labor Statistics
http://www.bls.gov/sae/home.htm

Trusting the birth/death model
James Hamilton
Econbrowser, November 16, 2007 08:17 AM http://www.econbrowser.com/archives/2007/11/trusting_the_bi.html

Why Haven't Home Construction Jobs Disappeared
John M. Berry
Bloomberg, July 9 2007 http://www.bloomberg.com/apps/news?pid=newsarchive&sid=azttcmXd75qk

---

Birth Death Model Fatally Flawed

Nonfarm payroll employment edged up +88,000 in April, and the unemployment rate was essentially unchanged at 4.5 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Job gains continued in several service-providing industries, including health care and food services, while employment declined in retail trade and manufacturing.

This was lower than the expected 100,000 and far weaker than it even looks. 25,000 of those 88,000 jobs were government jobs. In addition 28,000 goods producing jobs were lost.

Economic Recap

• Core capital spending for the quarter is negative

• First Quarter Advance GDP came it at 1.3%

• Companies are downsizing managers.

• Existing home sales had biggest monthly slump in nearly two decades

• US auto sales were terrible.

• The Philly Fed manufacturing outlook was near zero

How anyone could have expected good job growth in the face of those statistics is unexplainable. But more amazing yet are the Birth/Death job assumptions this month.



In the face of all that slowdown, somehow the BLS model added 317,000 jobs for the month.

Kevin Depew on Minyanville wrote about this today in on Minyanville wrote about this today in Five Things You Need To Know. Here are the first two.

Economic Deceleration Contained to Overall Economy

U.S. job growth in April slowed to 88,000, less than the 100,000 economists expected. And that's actually the good news.

* The bad news is related to the comical shenanigans of the the Birth/Death Model.
* The Birth/Death model contributed 317,000 adds.
* That's not a typo. That's 317 thousand adds.
* According to Minyanville Professor Scott Reamer, since 1999 there has been only one other month in which the add was bigger, January 2004.
* For some perspective, in the 36 month period ending March 2002 - 36 months - the total adds from the birth/death model were 353,000. Over 36 months.
* Since the beginning of the year, the birth/death model has accounted for a net 388,000 jobs.
* Last year it added 964,000 jobs.
* The kicker is that the Bureau of Labor Statistics refuses to allow academics and commercial economists access to the models they use for the birth/death additions.

2. GM Losses Contained to Auto Sales and Subprime Lending

General Motors' (GM) first-quarter earnings fell nearly 90% due to heavy losses related to subprime lending at GMAC, the carmaker's financial services arm.

* Here's what passes for "good news" over at GM:
The net loss from GM’s core North American automotive operations was "only" $42 million.
* Woo hoo!
* GMAC reported a first-quarter loss of $305 million earlier this week, compared with earnings of $495 million a year earlier.
* ResCap, the company's home-lending unit, lost almost a billion dollars.
* As if that's not sad enough, do you have any idea what the company's best markets are?
* Emerging markets. The Asia-Pacific region, Latin America, Africa and Middle East divisions accounted for nearly one-third of the GM's vehicle output.
* Latin America, Africa and Middle East were by far the largest contributors to GM’s earnings, reporting a record first-quarter profit of $201 million, according to the Financial Times.
* So, think about this for a moment:
America's largest car maker, number five in the Fortune Global 500, employing 335,000 people, is now almost entirely dependent on emerging markets just to remain operational.
* Oh, one last thing before we forget. Where exactly do all those consumers in emerging markets get their money?
* Pick up a random object on your desk and look where it was made.
* That's right. They get it by exporting things to U.S. consumers and getting dollars in return.

If there was ever any doubt about how flawed that birth/death model is, there certainly should be none now.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Posted by Michael Shedlock at 1:56 PM