Friday, September 3, 2010

August Jobs -54,000; Stocks Soar. Can Anything Be Trusted?

Total Nonfarm Birth/Death Adjustment +115

Why is that the most important number in this month's Non-farm Payroll Report issued by the Bureau of Labor Statistics (BLS)?

It's because the Birth/Death adjustmentis employed by the BLS to estimate the number of business openings (births) and the number of business failures (deaths) and is imputed into their formulas to come up with their monthly estimate of total US employment, better known as the monthly Non-Farm Payroll report.

Accordingly, when the BLS believes that there are more businesses opening than closing, the number is positive, boosting the overall employment picture, and the opposite when more businesses are failing.

From the charts provided by the BLS themselves, the birth/death model is accounting for a rapidly-expanding number of new businesses in the US (predominantly small businesses) as compared to businesses closing their doors. Should we be inclined to believe this fantasy, we would think the US economy, specifically small business, is booming and hiring new workers, though we know this is not even remotely the case.

We can make some comparisons and use other data to demystify the claims of the BLS. Specifically, we can look at the number of businesses filing for bankruptcy in 2010, and magically, we find a WSJ report that gives us a glowing headline - in support of the BLS birth-death model - though the devil, as usual, lies in the details.

The article states that while Chapter 11 reorganizations were down 17% in the first half of 2010 as compared to 2009, but Chapter 7 filings remained flat. So, what does this really tell us? Since Chapter 11 keeps a business's doors open, while probably reducing to some extent either wages or workers or both, that's positive, since fewer businesses are jumping through the Chapter 11 hoops and thus laying off fewer workers. But, when it comes to Chapter 7, which is liquidation, and was flat as compared to 2009, we should evidence no upside benefit to the birth-death model.

Now, let's check on new business startups, which is the "birth" part of the equation.

Here's an article which postulates that the average new business is hiring fewer employees now than in the past, which makes sense, as regulations and required filings have increased the small business burden while technology has allowed workers to be more productive. Add in the quest for outsourcing and you get the perfect scenario for new businesses not putting on as many employees as they used to, so when the BLS imputes the data for business births, they should consider that any new business will likely add fewer jobs than previously encountered.

On the positive side, the Ewing Marion Kaufmann Foundation reports that 2009 was a banner year for entrepreneurship, making the claim that, on average, 558,000 new businesses were started EACH MONTH in the year.

That is a monumental claim, postulating that 6,669,000 new businesses were formed in he year. Were that number even close to being true, the gains from new businesses should have almost completely eclipsed the losses from 2007-2008.

In contrast to the claims made by Kaufmann, which uses BLS data for baseline methodology, the WSJ posits that the number of new businesses fell by 24% in 2009, and 2008, though reportedly strong, was no banner year.

Outplacement firm Challenger, Gray and Christmas find that new business creation has fallen precipitously in the first half of 2010:
CHICAGO, July 19, 2010 – A new survey shows that start- up activity plummeted in the first half of 2010 as would-be entrepreneurs were either scooped up by employers or scared off by fragile economic conditions, a tight lending market and uncertainty over the sustainability of the recovery.

The Challenger study puts the figure at 3.7% of surveyed job-seekers, the lowest two-quarter average on record. The firm began collecting data in 1986.

The World Bank chimes in with a study of their own, stating:
We find that firm births contribute substantially to gross and net job creation. New firms tend to be small and thus the finding of a systematic inverse relationship between firm size and net growth rates is entirely attributable to most new firms being classified in small size classes.

Going back to the BLS birth/death charts, we note that in 2009, when business births were supposedly on the upswing, the BLS shows the model producing sizable gains in March, April and May, but then becoming pretty static for the remainder of the year. In 2010, the model number falls off a cliff in January, at -427,000, but then rebounds and posts gains in each proceeding month, eliminating and overshadowing the January losses.

In conclusion, there are simply too many numbers being thrown around in opposing directions for all of them to be right or to draw any conclusion except that the BLS birth/death model is structurally inconsistent, at times in opposition to competing data and more than likely employed to massage or move the overall non-farm payroll data month to month in whatever direction is politically palatable at the given moment.

Simply put, the birth/death model, on top of or imputed into raw estimates and seasonal adjustments, shrouds the entire non-farm payroll data in layers of stealthy and obscure adjustments.

Finally, here's a 2009 story from Bloomberg that screams, U.S. Job Losses May Be Even Larger, Model Breaks Down. That is about as close as one can come to saying that the government figures are useless and probably should not be trusted without actually saying it.

With the joyous news that August non-farm payrolls decreased by only 54,000 - beating expectations - stocks were off to the races, gapping once more at the open to lock in as many short sellers as possible. The markets maintained their positive bias throughout the remainder of the session, finishing close to their highs.

Investors looked past a terrible ISM Services index reading of 51.5 in August after showing 54.3 in July. Not surprisingly, bank stocks were among the leaders.

Dow 10,447.93, +127.83 (1.24%)
NASDAQ 2,233.75, +33.74 (1.53%)
S&P 500 1,104.51, +14.41 (1.32%)
NYSE Composite 7,055.03, +88.78 (1.27%)

Advancers clobbered declining issues, 4934-1488. New highs overwhelmed new lows, 415-49. Volume was non-existent, yet another signal that the rally is made on nothing but desire to trade, and is probably being directed by a small number of insiders.

NASDAQ Volume 1,512,487,250
NYSE Volume 4,127,134,500

Of the commodities we track, silver was the only winner, cementing a lengthy rally with a 28 cent gain, closing at 19.92. Gold slipped $2.30, to $1,249.20, while crude oil fell 42 cents, to $74.60.

It was quite a remarkable week for stocks. The Dow, which closed at 9985 just last Thursday, has managed a gain of 462 points in the last six sessions. There is likely more upside, though it may be limited in size and duration, as resistance begins around 10,600 on the Dow and 1125-35 on the S7P 500.

Enjoy the Labor Day holiday by not laboring. Get out and have some fun. Life is too short not to.

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