Evidence that Employment Stats Are "Wildly" Overstated

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Barry Ritholtz via Seeking Alpha gives yet another example of a disheartening trend, namely, that government-issued statistics that investors, economists, and businesses for analytical and planning purposes are increasingly dubious.

The case in point is the employment statistics. While the widely cited Bureau of Labor Statistics monthly employment report has showed tepid to reasonable employment growth, a more accurate count, Business Employment Dynamics, which comes out on a delayed basis, shows substantially lower job growth. For example, third quarter 2006 according to the employment report showed an addition of 442,000 jobs, while the BED found gains of 19,000. And the big culprit seems to be a “voodoo calculation, the “birth/death model” a plug to allow for business creation and failure (one we’ve commented on before). Note this feature was added in 2001.

From Seeking Alpha:

On Thursday, we discussed another employment measure, assembled from the quarterly census of state unemployment insurance records.

This measure is discussed in much greater detail this week in the Liscio Report, via Barron’s Alan Abelson:

UNLESS THE WORLD IMPLODES BEFORE THEN, this Friday the Bureau of Labor Statistics is slated to release May’s employment report. As the big day approaches, Wall Street, as it always does, will indulge in an orgy of guesswork as to what the numbers will be. That this is destined to prove an exercise in futility will not deter for a moment the participants from repeating it a month hence.

Actually, these cockeyed Nostradamuses are more deserving of sympathy than contempt. For apart from their own fallibility — which, since so many are card-carrying economists, is considerable — their prophecies are prey to the even more considerable whims, quirks and fantasies of Uncle Sam’s data assemblers.

Just how much such idiosyncracies distort the actual count of the gainfully employed and, by extension, of those out of work, is hard to pin down to the last decimal. But that it can be huge is evident in another report issued last week by that same Bureau of Labor Statistics (which might better be called the Bureau of Labored Statistics). It’s called Business Employment Dynamics, and we’d been in blissful ignorance of its existence until enlightened by that diligent duo, Philippa Dunne and Doug Henwood, responsible for the Liscio Report.

As Philippa and Doug explain, this series reports detailed gross job gains and losses in the private sector based on nearly complete coverage “of the employment universe provided by the unemployment insurance system.” More painstaking than the familiar monthly surveys of employment, the tally is published with a lag of several quarters; the one released earlier this month, for example, was for the third quarter of 2006. What it showed, though, was eye-opening.

Thus, compared with a gain for the quarter of 442,000 jobs reported in the so-called establishment survey, the Business Employment Dynamics, or BED, reckoning was a scant 19,000 additions. In manufacturing, the 9,000 jobs lost according to the payroll figures balloon into a loss of 95,000 jobs in the BED data; the improbable 20,000 additions in construction (think: housing) turns into a loss of 77,000 by BED’s measure; the 507,000 gain in private services shrinks to 108,00. And so it goes. Or, more accurately, so goes the job mirage.

One likely culprit, Philippa and Doug suggest, is that curious concoction known as the “birth/death” model used by the Bureau of Labor Statistics to estimate the gains/losses in jobs from the launching and demise of businesses. Thanks to this voodoo calculation, 156,000 were added in last year’s third quarter and a hefty 388,000 in the opening four months of this year. Nice going, indeed, considering that first-quarter GDP growth probably, when the dust clears, will have fallen below 1%, and April was a punk month.

All of which, among other things, solves a puzzle that seems to have bothered quite a few people: namely, how can the economy be running out of steam when there’s relatively little unemployment? The answer, pure and simple, is that there are significantly fewer folks working and significantly more folks out of a job than the official payroll numbers would have you believe. The next time someone assures you that the employment picture is bright, make sure he smiles when he says that. (emphasis added)

As we have laboriously argued over the past few years, this has not been a great post-recession cycle for private sector job creation. It has been a boom time, however, for creative accounting in government measurements.

The bottom line: New job creation has been mediocre, and wildly overstated by BLS since changes made to measuring jobs in 2001.

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