FRIDAY MACRO MIXER - THE PAYROLL FUDGE FACTOR

Once per year, the BLS benchmarks its payroll estimates against state unemployment insurance filings, which last year saw a significant drop in the previously-reported payroll employment levels. 

 

In the benchmark revision for the year beginning March 2009 (printed in 2010), the net effect of the BLS revision was an upward adjustment to the number of jobs losses during the recession of 900,000 jobs.  When the BLS first announced the massive 2009 benchmark revision, in effect the statement indicated that the underlying assumptions to the Birth-Death Model were missing certain jobs losses and it is not a reliable indicator.  The BLS’s model assumes that jobs created by start-up companies have more than offset jobs lost by companies going out of business.  So for the BLS this becomes their equivalent of a fudge factor; the ability to make the employment situation appear better than it really is.  We will be following up with a more in depth analysis of this effect early next week.

 

So far this year, the model has created an average of 53,000 jobs per month, including 115,000 jobs this month.  In this economy, it is interesting that the bias has been positive and not negative!  While there is no shortage of misinformation being broadcast through the media, the government seems to be a fully engaged participant.

 

With the September payroll numbers, the BLS is scheduled to publish its initial estimate of the benchmark revision for March 2010; once again we are likely to learn that the BLS got it wrong again and hundreds of thousands of people lost their jobs that we did not know about. 

 

Knowing how flawed the Birth/Death model is flawed, backing out the 115,000 of addition jobs this month, the non-farm payroll number would be closer to -169,000; worse than consensus and acceleration from last month's loss of -131,000. 

We just bought the TLT exchange-traded fund.   If the hope that unemployment is meaningfully improving and housing is stabilizing, we’ll be a buyer of the long end of the bond market on associated weakness.

 

Housing is not improving and unemployment situation is not either.

 

Howard Penney

Managing Director