Ray Stone of Stone & McCarthy Research Associates has some interesting observations on the quality of the payroll employment numbers released by the Bureau of Labor Statistics.
We’ve noted before some of the strengths and weaknesses of the Bureau of Labor Statistics’ birth/death model. The BLS payroll data come from a count of how many people are working at a surveyed set of business establishments. One inherent problem with such data is how you account for newly created firms that weren’t covered by your survey, and how to distinguish firms that don’t answer the survey from those that have gone out of business. The BLS attempts to estimate the number of births and deaths on the basis of statistical extrapolation of the data that it does observe in what is known as its birth/death model. This approach has its critics and defenders.
One of the even-handed analysts is Ray Stone of Stone & McCarthy Research Associates, whose recent observations (subscription required) include the following:
Over the years we have taken great pains to defend the BLS
Births/Deaths model (BDM) as an appropriate consideration in the
Bureau’s monthly payroll estimate. We have taken exception with a
number of commentators, who have erroneously argued that these are
imaginary jobs, and have provided an inappropriate boost to the
month-to-month payroll numbers….
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.
Some pundits have at times compared the birth/death adjustment (a seasonally unadjusted quantity) to the reported payroll growth (which is seasonally adjusted), which is a highly misleading comparison of apples and oranges. But Ray instead looks at the cumulative change in the seasonally unadjusted employment figures over the last twelve months, and compares these with the cumulative 12-month component that is attributable to the birth/death adjustment.
Reported payroll numbers have been showing slower but still positive payroll growth over the last year. Stone’s calculations imply that most of that growth is coming from the statistical imputation of the birth/death model as opposed to actual data, an imputation that could be particularly suspect if we have indeed been at a turning point, i.e., a period in which business deaths are more common than usual.
It’s not clear what the best thing to do in this situation might be. We know there’s a potential problem with the birth/death adjustment missing a turning point. But the private estimates from
Automatic Data Processing appear to be constructed as a forecast of the BLS payroll numbers, and the separate BLS household survey, though not subject to the same business birth/death problem, have been hopelessly erratic over the last three months, though exhibiting a more pessimistic overall trend than the payroll data.
My conclusion is that the job market is probably not as strong at the moment as the recent BLS payroll data would lead us to believe.