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Strategies & Market Trends : VOLTAIRE'S PORCH-MODERATED -- Ignore unavailable to you. Want to Upgrade?

To: Sully- who wrote (36134)	4/21/2001 3:11:05 PM
From: Sully-	Respond to of 65232

A contrary view on unemployment from the Dismal Scientist...... Employment May Be Even Weaker Than You Think By Francis X. Markey 04/18/01 8:30 AM ET With the deceleration of the U.S. economy now beyond question, the only point of debate is exactly how much it has slowed and where growth trends will go from here. Optimists can point to a number of economic indicators for signs of life, including the establishment employment report which, though weak, remains up nearly 1% from one year ago. The employment report could mislead these individuals however, as design flaws in the Bureau of Labor Statistics (BLS) survey may very well be masking greater weakness in U.S. payrolls. The BLS establishment employment survey is one of the most timely and most watched economic indicators available. Nonetheless, the survey's current methodology has been in place for some time, and the BLS fully acknowledges that the report needs to be revamped to correct the statistical limitations of the current model. Indeed, the federal statistical agency has already begun the gradual introduction of a newly redesigned survey, and the results have already revealed that the BLS may currently be overstating the overall number of jobs. The current survey uses a quota sample, which is an older method of sample surveying known to be at risk for a number of statistical biases. The survey uses more than 300,000 establishments nationwide to approximate total payroll employment growth from the previous month. The main problem in estimating national employment is accounting for new business births and deaths. That is, firms newly opened or shuttered since the last comprehensive employment count. To adjust the payroll estimates for these firms, a bias adjustment factor is included to the monthly employment totals. Translated, this basically means the BLS adds or subtracts jobs to the report each month in an attempt to account for these firm openings and closures. This bias adjustment factor is constant across the three months making up each quarter. The problem with the current bias adjustment factors is that they are particularly ineffective in times of rapid acceleration or deceleration in job growth. The adjustment term is derived from historical data and is quite slow to react to changing trends. The current bias adjustment factor is most likely a case in point. The bias used for the first quarter of 2001 is +145,000 jobs. This amounts to nearly 40% of the reported employment gain for the U.S. in the first quarter. Now, clearly the U.S. economy has slowed in the past year, yet the current adjustment factor being used to approximate job gains from new establishments is only slightly below the average of +150,000 jobs used in 1999 during the prime of the recent expansion. The new survey method is based on a probability sample, which provides a much greater degree of accuracy and promises to be much more flexible in response to current economic conditions. There is still a correction term for business births and deaths; which is unavoidable, as the most recent comprehensive count culled from unemployment insurance (UI) data lags by about nine months. The new adjustment term is much improved, however, by allowing for month-to-month fluctuations in the jobs added or subtracted and incorporating each new month of UI data as the data become available. The end result is that the new establishment employment survey is statistically more accurate and responsive. The example of the wholesale trade industry illustrates this fact, as well as highlighting the rising probability of an overstatement in current employment totals. The BLS is introducing the new survey in segments. Thus far, the new methodology has only been applied to the wholesale trade industry (it will be used for manufacturing, mining and construction as of the June benchmarks, and the rest will be added in 2002 and 2003). The last benchmark revision for the wholesale trade industry, which is equal to the magnitude of the BLS estimation error, was ten times larger with the old method than with the new, clearly displaying the improved accuracy of the new survey. Even more telling for the payroll report as a whole, the wholesale industry was expanding in line with the all other industries in the first quarter of 2000, but has since decelerated rapidly and is now growing at half the rate of the overall job base. All of this is not to say that the BLS employment report is no longer a valuable indicator. It remains a timely picture of current economic conditions. In times of rapid acceleration or deceleration in growth, however, it may be wise to take the report with a grain of salt--at least until the new survey is fully expanded into all industries over the next few years. dismal.com Ö¿Ö