Reply #2: Market Wrapup: A Little Bit of This, A Little Bit of That... [View All]

[Ghost Dog]

http://www.financialsense.com/Market/wrapup.htm
BY FRANK BARBERA, CMT

It has now been more than 6 years since the Bureau of Labor Statistics (BLS) introduced its ARIMA Birth-Death Model into the compilation of monthly payroll data. Using their own description we note that the model has two components which are used to ‘estimate’ or “impute” activity. From the BLS website, we note that:

* Earlier research indicated that while both the business birth and death portions of total employment are generally significant, the net contribution is relatively small and stable. To account for this net birth/death portion of total employment, BLS is implementing an estimation procedure with two components: the first component uses business deaths to impute employment for business births. This is incorporated into the sample-based link relative estimate procedure by simply not reflecting sample units going out of business, but imputing to them the same trend as the other firms in the sample.

* The second component is an ARIMA time series model designed to estimate the residual net birth/death employment not accounted for by the imputation. The historical time series used to create and test the ARIMA model was derived from the UI universe micro level database, and reflects the actual residual net of births and deaths over the past five years. The ARIMA model component is updated and reviewed on a quarterly basis.

* The net birth/death model component figures are unique to each month and exhibit a seasonal pattern that can result in negative adjustments in some months. These models do not attempt to correct for any other potential error sources in the CES estimates such as sampling error or design limitations.

Of particular interest is the last bullet point which alludes to the “seasonal” pattern that appears in the data. Well, to say that there is a “seasonal pattern’ in the data is really putting it mildly. In the table below, I show the monthly additions and substractions that the model has generated since inception. Note the huge positive affect seen every April and May, wherein the average additional ‘jobs added’ total +174K, and +165K over the last few years. The annual downward revision of jobs lost is always updated in January, which except for July, tends to be the only month where jobs are lost in any size. Why does this matter? Well, take a look at last month’s data point, where the Birth-Death Model kicked out a gain of 317,000 jobs for the month of April. The actual report gain from BLS was a much smaller than expected uptick of +88,000 jobs, BUT, that 88,000 gain includes the Birth-Death gain of 317,000, which ex-the Birth–Death gain means we really saw the economy shedding jobs on the order of a hefty loss of –229,000. Even if we assume that part of the Birth-Death Model gains were valid, say for example, 100,000 of the 317,000 jobs, we are still looking at job losses greater then 100,000 for the month. In my view, this is proof positive that the economy is slowing and that employment in coming months will follow the weak Retail Sales and GDP numbers to the downside.

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