Reader Emails on Birth/Death Model and Unemployment Rate

I have gotten many question about revisions to the Reader Emails on Birth/Death Model and Unemployment Rate.

In case you missed it the BLS has admitted that its Birth/Death Model has overestimated jobs by about 800,000. The New York Times talked about this in Jobs Vanish.

The Labor Department said that it planned to revise the job figures by subtracting more than 800,000 jobs that it had wrongly estimated were filled by workers.

The so-called “benchmark revision” that was announced today will not formally be incorporated into the job figures until February, and could be revised. But the figures indicate that last March the government overestimated the total number of jobs by 824,000, or 0.6 percent. Its overestimate of private-sector employment was even greater — 855,000 jobs, or 0.8 percent.

The culprit is probably the much maligned birth-death model, although Victoria Battista, an economist at the Bureau of Labor Statistics, said the bureau was looking into other possible issues, such as changing response rates to the questionnaire sent out by the bureau to employers each month.

That model adds in jobs assumed to have been created by employers who are too new to have been added to the survey, and subtracts jobs from employers assumed to have failed and therefore not responded to the bureau’s survey.

I have been complaining for years that the Birth/Death model was on Mars.

I include in every monthly jobs post a statement similar to this one: "At this point in the cycle birth death numbers should have been massively contracting for months. The BLS is going to keep adding jobs through the entire recession in a complete display of incompetence."

At least they finally understand there is a problem, years after it was obvious to anyone using some semblance of common sense.

Birth Death Model Revisions 2009



click on chart for sharper image

Given those fantasyland projections I have serious doubts that 800,000 take aways is enough.

Short Comings In BLS Birth Death Model

Inquiring minds are reading Recession shows shortcomings in U.S. economic data.

The U.S. government is having a tough time guesstimating how many small businesses failed in this recession, casting doubt on the reliability of vital data on employment and economic growth.

The formula the U.S. Labor Department designed to help it deliver timely, thorough monthly employment reports broke down in the heat of the financial crisis, miscounting the number of jobs by an estimated 824,000 in the year through March.

That model appears to have misjudged how many companies went out of business during the recession, meaning the labor market was even weaker than initially thought when President Barack Obama took office in January. More recent figures may still be underestimating job losses now, but it will be many months before the Labor Department is certain.

One characteristic of this recession is that it has hit small businesses especially hard, driving down demand and choking off vital sources of credit at the same time.

Jan Hatzius, an economist at Goldman Sachs in New York, thinks that is distorting not only the employment data, but also figures for retail sales, durable goods and even the biggest economic indicator of all -- gross domestic product.

Indeed, 43,546 businesses filed for bankruptcy in 2008, the highest tally since 1998, and the pace has picked up this year, according to data from the American Bankruptcy Institute.

In the second quarter of 2009, the most recent data available, 16,014 businesses filed for bankruptcy, up from 14,319 in the previous three-month period and the highest mark in 16 years.

The Labor Department simply can't catch all those failures fast enough to compile its monthly employment reports, which are normally released on the first Friday after the end of the month. So it must make an educated guess.

Each month, the department surveys about 160,000 firms to get a sense of how many jobs were added or cut. It also uses the "birth-death" model to try to estimate out how many companies opened or closed.

Once a year, the department looks at unemployment insurance tax records to get a more accurate picture of how many people were employed, and matches that up with its own data. Each February, it tries to reconcile these differences by releasing a "benchmark revision".

Normally, the discrepancy is modest. This coming February, it is likely to be about 824,000, according to the Labor Department's preliminary estimate last month. That would mean instead of about 7.2 million jobs lost since the start of the recession in December 2007, there were more like 8 million.

"Preliminary research indicated that a big portion of that was a result of a breakdown in the birth-death model," said Chris Manning, the department's benchmark branch chief.

Somehow throughout this entire recession, the BLS model showed that more jobs were being created by new businesses (birth) than those lost by businesses going out of businesses. When you think about all the small 1-2 person businesses in real estate that folded shop I just do not buy the BLS's data.

They are revising it, but I do not think by enough.

Reader Question On The Unemployment Rate

Kevin (and many others have asked) "What exactly do you think is going to happen to all these missed unemployed people? Is the unemployment rate going to spike in January, or does it get added in gradually?"

In terms of the unemployment rate, what happens is nothing. The unemployment rate is measured by the Household Survey not the Establishment Survey. The Birth/Death Revisions are to the Establishment Survey.

So while there will be dramatic revisions to the Establishment Survey in terms of jobs lost in the January report (published on the first Friday in February), it will not affect the unemployment rate.

Given how screwed up the Establishment Survey is (not that I have any love affair with the Household Survey), when the economy does turn it will likely show up in the Household Survey first. This is what happened at the end of the last recession and it will likely happen again.

There has to be a better way than either of these methods.

Manning said his department was still trying to figure out what went awry this time. One possibility is that the model was not sensitive enough to the credit crunch, which choked off borrowing and pushed many companies into bankruptcy.

"We're researching ways to better understand the limitations of the model, in particular when it comes to responding to economic shocks," he said.

Manning said his department was still trying to figure out what went awry this time. One possibility is that the model was not sensitive enough to the credit crunch, which choked off borrowing and pushed many companies into bankruptcy.

"We're researching ways to better understand the limitations of the model, in particular when it comes to responding to economic shocks," he said.

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