A research report from Morningside Hill Capital
sourced from Zerohedge shows that 93% of the jobs “created” since 2008
were Birth/Death model estimates. While some portion of those jobs were
no doubt legitimately created, the issue is over-estimation of jobs
created by new businesses net of jobs lost from failed businesses. As
it turns out, most of the job growth that has been reported by the
Government since 2008 – and which in turn fueled some massive stock
rallies – never existed.
Ronald Reagan’s administration was the “culprit” behind the creation
of the Birth/Death model because apparently Reagan was complaining that
the BLS was undercounting the jobs he “created” (from the link above, pg
11).
The source of estimation error derived from the methodology used by
the Census Bureau is highly flawed because it extrapolates B/D growth
estimates based on historical experience. When the economic activity in
the current period is below the historical rate of economic activity
(real economic activity, not inflation-generated growth or growth
fashioned from data manipulation), the slow-down in new business
formation that occurs in reality is not picked up by the B/D model.
BLS Admits High Error Potential – If you bother to
sift through the section of the BLS website that describes the
Birth/Death model methodology – something which Wall Street analysts and
financial news reporters have never bothered to do – the BLS admits
the high potential for error. From the BLS website:
The primary limitation stems from the fact that the model is, of necessity, based on historical data. If
there is a substantial departure from historical patterns of employment
changes in net business births and deaths, as occurred from 2008 into
2009 during the 2009 benchmark, the model’s contribution to error
reduction can erode.
As with any model that is based on
historical data, turning points that do not resemble historical patterns
are difficult to incorporate in real time. Because there is no current
monthly information available on business births, and because only
incomplete sample data is available on business deaths, estimation of
this component will always be potentially more problematic than
estimation of change from continuing businesses.
Perhaps the biggest source of error comes from the Census Bureau’s
estimate of jobs from workers not covered by UI tax reports (employers
required to pay out unemployment insurance). These are part-time workers
(primarily independent contractors). As the BLS admits:
There are some types of employees
that are exempt from UI tax law, but are still within scope for the CES
estimates. Examples of the types of employees that are exempt are
students paid by their school as part of a work study program; interns
of hospitals paid by the hospital for which they work; employees paid by
State and local government and elected officials; independent or
contract insurance agents; employees of non-profits and religious
organizations (this is the largest group of employees not covered); and
railroad employees covered under a different system of UI administered
by the Railroad Retirement Board (RRB). This employment needs to be
accounted for in order to set the benchmark level for CES employment.
Over time some sources from which CES draws input data have become unreliable.
Thus, even the BLS admits that the B/D model is B.S. Furthermore, in
all probability, the “Death” component of the B/D model likely has
outweighed the “Birth” component of the B/D guesstimates, as new
business formation is at a 40-yr low based on two studies, one from the
Census Bureau and one from Gallup. Per Gallup, the rate of firms closing began to exceed the number of new businesses in 2008.
Thus, by the BLS’ and Census Bureau’s own admission, the B/D model has
grossly over-stated the number of net jobs created since 2008. In
fact, in all probability, the number of jobs from business “births” and
“deaths” has declined.
It is likely that the U.S. economy has lost jobs since 2008. This
would explain why the Labor Force Participation Rate has declined to a
level not experienced since the late 1970’s when household’s were
primarily composed of one income providers. The concept that the
number of jobs since 2008 has, in reality, declined is reinforced by the
fact that 94.98 million of the 254.77 million civilian
non-institutional population –
over 37% of the 15-yr old to 64-yr old population – is no longer considered to be part of the Labor Force.
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Dave Kranzler spent many years working in various Wall Street jobs. After business school, he traded junk bonds for a large bank. He has an MBA from the University of Chicago, with a concentration in accounting and finance, and graduated Oberlin College with majors in Economics and English. Dave has nearly thirty years of experience in studying, researching, analyzing and investing in the financial markets. Currently he co-manages a precious metals and mining stock investment fund in Denver and publishes the Mining Stock and Short Seller Journals. Contact Dave at dkranzler62@gmail.com.
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The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.
