How Much Did the BLS Birth-Death Adjustment Pad the May Jobs Report?

Tyler Mitchell By Tyler Mitchell Jun14,2024 #finance

This question comes up every month. And every month, people who have no idea how the model works post inaccurate analysis.

Birth-Death Adjustment Yet Again

The above statement by Peter Schiff and similar statements by others are false. Schiff should know better. Even prominent economists make the same mistake.

Unfortunately, others repeat this stuff over and over without anyone doing any basic research that immediately disproves the claim.

I will go over the details of why Schiff is wrong, but first let’s discuss the process. Here is a link to a BLS discussion of the Birth-Death Adjustment model.

The birth-death model pertains to the birth and death of corporations not individuals. When corporations go into business they add workers and those workers are not in the BLS sample. So the BLS uses these birth-death adjustments to tweak its monthly jobs reports.

If this seems totally convoluted, it’s because it is totally convoluted.

Instead of relying on tax data, the BLS relies on the model. The BLS rationale is that not everyone reports tax data in the reference week, once a month, that determines the report.

The reference week and the relatively small sample vs quarterly reports are sources of error. In general, people do not look at the quarterly reports because they prefer the instant gratification of highly suspect numbers.

I discuss quarterly numbers below, but first let’s continue with other sources of error in the monthly reports.

BLS Reference Week

The BLS sample is about 6.5 percent of the data, taken once a month ion the reference week.

Like Peter Schiff, Danielle DiMartino Booth, and Lacy Hunt, I am highly skeptical of this jobs report.

Every month in my Jobs Report Analysis, I post these statements “For those who follow the Birth-Death numbers, I retain this caution: Do not subtract the reported Birth-Death number from the reported headline number. That approach is statistically invalid.

But that is what Schiff did. It’s not just Schiff. Sadly, prominent economists make the same mistake.

Birth-Death Adjustment

For convenience, here is the lead chart again.

The BLS birth-death adjustment added 231,000 jobs to the unadjusted total in May. It added 603,000 to the unadjusted numbers for the year.

Mass layoffs have nothing to do with this, nor do bankruptcies. It’s an estimate of business openings and closings. Were there 603,000 new jobs this year created by new businesses? 231,000 in May?

Color me very skeptical, but I have no idea what the number is. Nor does anyone else. In general, more businesses open than close over time, but the estimates are highly likely to be very wrong at turns.

Seasonal Adjustments

Importantly, the birth-death numbers are not seasonally adjusted.

You should not subtract these unadjusted numbers from the reported seasonally adjusted jobs numbers.

My Conversation With the BLS

  • Mish: How much did the Birth-Death adjustment impact the seasonally-adjusted gain?
  • BLS: Because of our methodology, we don’t know.
  • Mish: What is the seasonally-adjusted Birth-Death number?
  • BLS: Because of our methodology, we don’t know.

That conversation was not from last month but rather from over 10 years ago. That’s a synopsis. The BLS was polite, not abrupt as presented above.

Nothing has changed except tweaks to the model that supposedly improve it, and likely do (but that does not imply the model is accurate at economic turns).

The following process, derived from a long conversation with the BLS, explains why the BLS itself does not know how the birth-death number impacts the headline number.

Five-Step Process

  1. The BLS calculates the unadjusted birth-death number. It’s an undisclosed magic hat based on experience.
  2. The birth-death adjustment is made to unadjusted overall estimate for the month.
  3. The BLS takes the unadjusted total, including the adjustment, then seasonally adjusts the number.
  4. The BLS then compares the seasonally-adjusted number for this month and subtracts the seasonally-adjusted number from last month.
  5. The difference between the seasonally adjusted numbers is the headline total.

That’s why the BLS cannot say, nor can anyone else say, how much the birth death model impacted the seasonally-adjusted headline number.

The following chart should make it clear why one cannot subtract unadjusted numbers from seasonally-adjusted ones.

Nonfarm Payrolls SA vs NSA

I created the above chart today to show the silliness of typical birth-death subtraction analysis.

The actual math shows it’s even worse than it looks.

Actual Math for May 2024

  • The unadjusted total payroll for May including the B/D adjustment is 158,918,000 (158.9 million)
  • Of that unadjusted total, 231,000 (231 thousand) were from the birth death adjustment
  • The BLS then seasonally adjusted that number to arrive at the reported SA headline number of 158,543,000.
  • Ta Da! The reported headline number for May (158,543,000) is 375,000 lower than the unadjusted report total (158,918,000).

Question of the Day

Q: How much did the birth death adjustment boost the reported May report of 158,543,000?
A: You don’t know, I don’t know, and amazingly not even the BLS can tell you because the process is so convoluted.

Whatever the number, except by extreme accident, it certainly is not 231,000 and probably not anything close.

Bonus Question of the Day

Q: Is it possible this Birth-Death procedure is artificially padding payrolls?
A: Of course. But you don’t know how much, I don’t know how much, and not even the BLS can tell you!

However, we can say that sensible people do not believe this jobs report. Let’s put a spotlight on why.

QCEW Discrepancy

With little doubt, the QCEW data tells us something, perhaps many things including the birth-death adjustment, is artificially padding the monthly numbers.

QCEW (Quarterly Census of Employment and Wages) is a count of Unemployment Insurance (UI) administrative records submitted by 11.9 million establishments. That’s about 99 percent of the data.

Nonfarm Payrolls are are from the Establishment Survey (CES). The sample survey was 666,000 individual worksites in 2023. That’s about 5.6 percent of the data.

Clearly, QCEW will be far more accurate than these monthly convolutions.

How Much Does the BLS Overstate Monthly Jobs?

I discussed the above question in my June 6, 2024 post How Much Does the BLS Overstate Monthly Jobs? Here’s the Answer

Understanding the Discrepancies

If the difference was nearly constant, say ~2.5 million, it would not matter. But if sharply increasing or decreasing numbers happen near recessions, the discrepancies do matter.

Comparing NSA numbers, Nonfarm payrolls are 3.42 million higher than QCEW numbers. That is the largest difference since 3.46 million at the height of the Covid pandemic.

The only other 3+ million difference was in the third quarter of 2020.

After discussing this with Lacy Hunt, he suggested that I look at percentages. Here are two new charts that better show what’s happening.

Y-O-Y Percent Percentage Change in Nonfarm Payrolls vs QCEW

The percentages look tiny. But they are trending, not random. And multiplied by 150 million jobs, the numbers are significant.

I recall reading a BLS statement that anything over 0.1 percent is significant, but I cannot locate that comment.

Let’s show the result in numbers instead of percentages.

Year-Over-Year Change in Nonfarm Payrolls vs QCEW in Thousands

Note that coming out of recessions, the BLS monthly reports understate jobs growth. Heading into recessions, when data is weakening, the opposite occurs.

Another Bizarro Jobs Report – Payrolls Rise 272,000 Employment Drop 408,000

For more details on the May jobs report, please see Another Bizarro Jobs Report – Payrolls Rise 272,000 Employment Drop 408,000

Once again, rational people wonder what’s going on with the jobs report. The discrepancy between the trend in jobs and employment surges again.

The allegedly stunning jobs report shows that over the past year jobs are up 2.76 million from a year ago but employment is up only 376,000.

The report also shows full-time Employment is -1,163,000 vs a year ago.

Click on the preceding link for more details.

A Second-Quarter Recession This Year Looks Increasingly Likely

I believe we are headed for recession this year. A recession may have even started.

For discussion, please see A Second-Quarter Recession This Year Looks Increasingly Likely

The GDPNow model I refer to in the above post is now sharply higher, some of it based on the May jobs report.

Cumulative Birth-Death Errors

Given that I put a spotlight on the significance of 0.1 percent errors, what if the Birth-Death numbers accumulate significant errors?

Here is the math for May.

Birth-Death 231,000 / (158,918,000 – 231,000) = 0.0014556
Call it 0.15 percent.

A cumulative monthly error like this could be a key source of the QCEW errors at economic turns, although 0.015 percent per month seems ridiculously high.

For the sake of argument, let’s assume the Birth-Death model is on the high side by ~0.10 to ~0.15 percent per quarter (not per month).

If the Birth-Death error wrongly accumulates every month in the same direction at economic turns (say 0.10 to 0.15 per quarter), that is a big piece of the discrepancy puzzle.

Conclusion

The birth-death model may be a significant source of the QCEW vs CES discrepancy. But the whole process is so convoluted, in so many places, that it is hard to pinpoint a precise source of the errors.

The Birth-Death adjustment could be a major or minor source of the error.

Regardless, we can say that QCEW and other weakening hard data provide ample reason to mock the current report.

Through the fourth quarter of 2023, QCEW suggest the monthly CES report overstates jobs by about 735,000 jobs, all in the second half of 2033. That’s 125,500 jobs a month, on average.

What is the discrepancy now for 2024 Q1?

The current CES to QCEW discrepancy is 0.45 percent. Will the discrepancy for 2024-Q1 be in the range (0.055-0.075)? I will be watching this.

Schiff is right to be suspicious, and so is everyone else. But let’s not use invalid birth-death monthly math to come up with a number for this month, or any month.

Tyler Mitchell

By Tyler Mitchell

Tyler is a renowned journalist with years of experience covering a wide range of topics including politics, entertainment, and technology. His insightful analysis and compelling storytelling have made him a trusted source for breaking news and expert commentary.

Related Post

Leave a Reply

Your email address will not be published. Required fields are marked *