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Creating Consumers
January 14, 2005

The Labor Department recently announced that US employers created 2.2 million non-farm jobs last year, on a seasonally adjusted basis. With that kind of job creation, perhaps corporate America will secure the financial future of the country, and the world at large. After all, if 2.2 million jobs were created then 2.2 million consumers were empowered.

But, how accurate are labor figures?

The Department of Labor doesn’t go out every month and count all those who have jobs. Employment estimates are based on a sample of US corporations, and the data is then statistically treated to give an approximation of the overall labor environment.

During the 1990s, the Labor Department felt that employment estimates did not account for the number of jobs created when new companies were formed. As you may recall, thousands of new companies were being formed during that “New Era” of the tech-boom. So a method was devised to account for those jobs.

In June 2000, the CES (Division of Current Employment Statistics of the US Department of Labor) began implementing a new adjustment to the employment data based on a corporate net birth/death model.

It works something like this: based on the number of business closures, the Bureau of Labor Statistics (BLS) estimates how many businesses are created. And based on how many businesses they think were created, they add a number of jobs. The only measured sample here is how many businesses closed down; all the rest is guesswork.

The BLS website admits that “…The most significant potential drawback to this, or any model-based approach, is that time series modeling assumes a predictable continuation of historical patterns and relationships, and therefore is likely to have some difficulty producing reliable estimates at economic turning points, or during periods when there are sudden changes in trend.”

During the Nineties, when an inordinate amount of new businesses were incorporated, the number of new businesses created relative to business failures was large. Now, I suspect, the opposite might be true. So the first question, is how accurate is the estimation of new businesses created in 2004, based on businesses that closed down? In other words, is it reasonable to assume we are dealing with a predictable continuation of historical patterns and relationships in the birth/death ratio of corporations in the current economic climate?

The second question, clearly, is how accurate is the estimation of employees per business created? For example, I work for myself, and as part of my own business planning I incorporated three companies last year. However, I did not hire even a single employee. So how relevant are new business registrations to the overall employment figures?

According to the BLS, the net amount of jobs added by the birth/death calculations is “relatively small”. So why worry about it?

The birth/death factors are not seasonally adjusted, and so cannot be subtracted out from the seasonally adjusted labor numbers; they can only be compared to non-seasonally adjusted numbers.

The US economy supposedly added 2.2 million non-farm jobs last year. The non-seasonally adjusted numbers, including farming, however, show that only 1.722 million jobs were created. Now, the interesting thing is that in a separate press release, the BLS announced that the imputed number of jobs created from its birth/death model for 2004 was 836,000, or 48% of the total number of jobs created during the whole year. In my books 48% is most certainly not a “relatively small” percentage.

Now, I don’t know if the employment numbers are right or wrong. But I do know that if roughly fifty percent of the jobs created last year were created on a spreadsheet, based on how many businesses were incorporated, and how many jobs those new business created, based on how many businesses failed, then I have my suspicions.

The point is that if the US economy is not creating the jobs that we are led to believe it is creating, who is going to buy all the stuff that American corporations are producing? America most certainly cannot rely on foreign consumption; it has a trade deficit.

Perhaps here are more accurate indications of the labor situation: the US labor force participation rate is declining, especially among younger workers. The labor force participation rate is the percentage of the "working age" population that is willing and able to work, and is either employed or actively seeking employment. The trend data show that while younger people are, apparently, less eager to join the work force, the number of people fifty-five years and older, working, or looking for work, is increasing. That doesn’t sound healthy to me.

Could it be that a lack of employment opportunities is keeping younger people out of the labor market while the older work force is forced to work because they cannot afford retirement? Are those the kind of demographics that would suggest we are just about ready for another period of sustained economic growth in the United States?

Paul van Eeden

Paul van Eeden works primarily to find investments for his own portfolio and shares his investment ideas with subscribers to his weekly investment publication. For more information please visit his website (www.paulvaneeden.com) or contact his publisher at (800) 528-0559 or (602) 252-4477.

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