Tuesday, July 22, 2008

Truthiness invades Employment Data.

For some time many bloggers with far greater reach have accurately railed against the fiction coming out of the Bureau of Labor Statistics (BLS) regarding employment data.

The complexity of the US economy makes it necessary for statisticians to employ some formulas in their models to allow for new business formations that haven't been captured by any other Federal agency. In theory, this seems harmless enough.

However, the media and (unfortunately) many intellectually challenged money managers have latched onto the headline number - Jobs gained or lost.

The most dangerous component of these models is the Birth/Death Adjustment which is little more than a guess at the new jobs created by newly formed companies.

In June, this estimate accounted for 177,000 new jobs and without these "jobs" the net loss of jobs in June would have been north of 230,000 (rather than 60,000 as reported).

Included in the 177,000 new jobs created was an estimate of 29,000 new construction jobs and over 80,000 jobs in leisure/hospitality. Anyone that has read the horror stories on construction activity around the country knows that the construction number is ridiculous.

Prior to 2001 the Birth Death adjustment averaged less than 20,000 jobs per month. Over the past 5 months the Birth Death adjustment added 922,000 jobs or almost 185,000/month.

Commercial Bankruptcies have spiked as of late and this is an indication that the reality is far from the truthiness put forth by the BLS.

The real danger comes in the first week of August when the BLS adjusts for Birth Death errors in the previous six months. If they are honest the revisions could be historic, but honesty is not a strength of the B(L)S.

Current market conditions - This short covering rally has a little more legs, but once we get past earnings season I expect the professionals to get short again in big way. A number of favorite short names are up 30-60% in a week and they will be the first to be targeted when the real money comes back to play.

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