Jobs, Jobs, Jobs

It was backslaps and high-fives all the way around this morning on Squawk Box as the non-farm payroll number for April came in at +274,000 - this was heralded as more evidence that the underlying economy is strong and that this recovery is sustainable ... yes, of course.

Not surprisingly, there was a net loss in manufacturing jobs for like the 999th month out of the last 1000, but the good news was that construction and service jobs showed robust increases. They've just added a separate category for Real Estate Agent and, as you might expect, there were healthy gains there (just kidding!).

So, +274,000 new jobs ... Hmmm. As described on the BLS website, this number is arrived at like this:

"This information is collected from payroll records by BLS in cooperation with state agencies. The sample includes about 160,000 businesses and government agencies covering approximately 400,000 individual worksites. The active sample includes about one-third of all nonfarm payroll workers. The sample is drawn from a sampling frame of unemployment insurance tax accounts."

Sounds legit, huh?

Look at the unemployment insurance records, then seasonally adjust, and voilà!

Well, not exactly ...

Let's look at the other adjustment that gets done - the "Cheney adjustment", uhhhh... I mean the "Birth/Death Model Adjustment" is an adjustment to account for jobs that could not be accurately reflected in the unemployment insurance data because they were created by new businesses which had not yet reported to the state agencies. If you look at data for the month of April, you find a staggering +257,000. So, can you just subtract the adjustment from the headline number to determine what the unemployment insurance survey indicated? As described on the FAQ, the answer is (obviously) No!

Q: Can I subtract the birth/death adjustment from the seasonally adjusted over-the-month change to determine what it is adding to employment?

A: No. Birth/death factors are a component of the not seasonally adjusted estimate and therefore are not directly comparable to the seasonally adjusted monthly changes. Instead, the birth/death factor should be assessed in the context of its effect on the not seasonally adjusted estimate.

Q: Can BLS provide an estimate of the contribution of the birth/death adjustment to the seasonally adjusted monthly payroll change? Can BLS independently seasonally adjust the net birth/death component?

A: There is not an estimate of the seasonally adjusted contribution of the birth/death model. The sample collected on a monthly basis, the imputation of business births using deaths, and the net birth/death model are all necessary components for obtaining an accurate estimate. The components are not seasonally adjusted separately because they do not have particular economic meaning in and of themselves.

Yes, it's much more complicated than that - and good luck locating the not seasonally adjusted data - you'll have to just trust the BLS to do the right thing. And oh, by the way, don't forget this note on the main Birth/Death Model page:

"The most significant potential drawback to this or any model-based approach is that time series modeling assumes a predictable continuation of historical patterns and relationships and therefore is likely to have some difficulty producing reliable estimates at economic turning points or during periods when there are sudden changes in trend."

So, this means that, if we are at a turning point right now, for example, as some other indicators seem to be pointing toward, due to the Birth/Death Model adjustment, the reported jobs numbers may not reflect that turning point until the yearly revision is performed in January 2006.

Hmmm...

Now, that's what I call intelligent design!