The Corpus Callosum

This is a bad sign. Specifically, it is an instance of the mainstream media starting to hint at the truth. I take this as a sign that things are getting worse, as the effort to keep up the pretense is no longer even remotely credible.

What this article shows, is that the economic models are wrong. That in itself is not news. Regular visitors know that all models are wrong. But they can be useful, if the underlying assumptions are correct, or nearly so.

U.S. Job Losses May Be Even Larger as Labor’s Model Breaks Down
By Carlos Torres
Bloomberg

Oct. 2 (Bloomberg) — The U.S. economic slump earlier this year was so severe it short-circuited the government’s model for calculating payrolls, raising the risk that today’s jobs report may be too optimistic.

About 824,000 more jobs may be subtracted from the payroll count for the 12 months through last March when the figures are officially revised early next year, a Labor Department report showed today. The revision would be the biggest since the government started adjusting the numbers in 1991…

“This birth/death model is still assuming that we are getting new jobs from new-business creations,” David Rosenberg, chief economist at Gluskin Sheff & Associates Inc. in Toronto, said in an interview.

“These additions are coming somewhere from ‘Alice in Wonderland,’” he said, referring to the novel by Lewis Carroll detailing the adventures of a girl that fell down a rabbit hole into a fantasy world.

“Even though the current data is bad, the numbers are actually even worse,” Rosenberg said.

This is not an example of how government data are manipulated intentionally. There are plenty of examples of that, elsewhere. Rather, this is an example of how a model can fail. The model is based upon certain assumptions. These assumptions are reasonably reliable, if conditions do not depart from normal by very much, and if the rate of departure is modest.

In the current conditions, neither condition is true. The departures from normal are large, and they are changing quickly. Granted, that alone does not tell you if things are better, or worse, than what the model says. You have to look at the details. The Bloomberg article reports that the model errs by assuming that there is a certain rate of job creation that the surveys do not capture. That is because new businesses are not surveyed right away.

Are new businesses still being created at the old rate? Well, look at what is happening in commercial real estate and business loans. Yeah. I thought so.

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(image source)

Comments

  1. #1 MRW
    October 2, 2009

    Reminds me of a similar situation a few months back. The seasonally adjusted job number assume things like the temporary layoffs of a certain number of auto workers at a certain time each summer. This year, the automakers closed early, which distorted the summer numbers.

  2. #2 Monado, FCD
    October 3, 2009

    It reminds me of when Jean Chretien’s Liberal government stopped counting the number of people who registered as looking for work and started counting the smaller number who qualified for unemployment benefits because of losing a previous job. The “unemployment rate” took a large drop and they patted themselves on the back for improving the job situation.

    Now, instead of registering as looking so that the office can pair you up with job opportunities (while you continue to look, too), the employment offices simply offer kiosks and computerized searches to anyone who visits the office, because if they started started to count people who were looking for work, they might have to admit that there are more of them than there are people getting unemployment insurance payments.

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