Sunday, May 16, 2004

Statistically "Enhanced" Jobs Report?

A friend of mine, call him "B", sent me a reference to an online article at the New York Post. This article by John Crudele claims that the recent job reports have been inflated by overly rosy statistical modeling assumptions. This would tally with the oldman's economic sense of the lay of the land and with the reports he gets from people in various businesses.

I don't think we need look for a "conspiracy theory" to explain this. The Labor Department has been relentlessly overestimating worker productivity for years, and some of their ad hoc changes to their models produce strange artifacts in their figures. There's been pressure from above to spruce up the number for years and over various Administrations.

As an old Midwestern farmer once told me, government figures are "liars' figures" but it's more true that they're "fools' figures".

Here's John Crudele's NYP article, and here are the relevant paragraphs...

May 11, 2004 -- DON'T get too excited about all those new jobs that were supposed to have been created in April. I'm not going to waste a lot of my precious space on this, but the bottom line is that most of the 288,000 jobs that the Labor Department says were created last month may not really exist.

They could be figments of statisticians' optimism.

Anyone who plodded through my column last Thursday knows I predicted that job growth in April would be better than the 160,000 to 170,000 jobs that the "pros" were anticipating.

But I also said, quite emphatically I hope, that the stronger growth would be an illusion - the result of the Labor Department's computers making happy predictions about seasonal job creation that could neither be verified nor justified.

I'll explain one aspect.

Back in the March employment report, the government added 153,000 positions to its revised total of 337,000 new jobs because it thought (but couldn't prove) loads of new companies were being created in this economy.

That estimate comes from the Labor Department's "birth/death model." You can look up these numbers on the Department's Web site.

As staggering as the assumption about new companies was in March, the Labor Department got even more brazen in April.

Last Friday, it was disclosed that these imaginary jobs had been increased by 117,000 to 270,000 for the latest month - because, I guess, the stat jockeys got a vision from the gods of spring.

Without those extra 117,000 make-believe jobs, the total growth for April would have been just 171,000 - sub-par for an economy that's supposed to be growing at more than 4 percent a year, but right on the pros' targets.

Take away all 270,000 make-believe jobs and, well, you have the sort of pessimism that the political pollsters are seeing.

If I was the suspicious type (and if I thought Washington was smart enough), I'd suspect a nasty motive behind the sudden surge in these mystery jobs. But for now, let's just acknowledge their existence.

Also keep in mind that the government doesn't distinguish between good companies being created and, say, a guy doing consulting work out of his basement because he can't find real work.

What does this new job announcement mean in the real world?

It means there will be more pressure on the financial markets, as we've seen for a while but especially since last Thursday.

It also means that the Federal Reserve now has the excuse it needs to raise interest rates in June (as I've said before would happen) and will probably start regretting that move by the end of the summer.

And President Bush will probably give in to temptation and start crowing about the economy, going against the mood, as captured by pollsters.

This will make him look as out of touch with reality as his father did.

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