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Jobless-Rate Forecast Still Way Off


Why has the Fed remained so optimistic?


In January, I forecast the unemployment rate would hit 9.8% by August. Meanwhile, even though it was clear the Fed was wildly off base in its adverse scenario, the Fed upped it total to a mere 9.2% to 9.6% for the year as noted in Fed's Economic Forecast Worsens; Still Ridiculously Optimistic.

"The Fed's forecasts, released as part of the minutes from its April meeting, show that its staff now expects the unemployment rate to rise to between 9.2% and 9.6% this year. The central bank had forecast in January that the jobless rate would be in a range of 8.5% to 8.8%, but the unemployment rate topped that in April, hitting 8.9%."

Given that unemployment is likely to continue rising through the end of the year and probably for another six months to a year after that, it can be seen the Fed is still ridiculously optimistic, unless they revised higher again and I missed it.

This morning, the Bureau of Labor Statistics (BLS) released the August Employment Report.

"Nonfarm payroll employment continued to decline in August (-216,000), and the unemployment rate rose to 9.7%, the US Bureau of Labor Statistics reported today. Although job losses continued in many of the major industry sectors in August, the declines have moderated in recent months."

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Establishment Data

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  • 216,000 jobs were lost in total versus 247,000 jobs last month.

  • 65,000 construction jobs were lost versus 76,000 last month.

  • 63,000 manufacturing jobs were lost versus 52,000 last month.

  • 80,000 service providing jobs were lost versus 119,000 last month.

  • 10,000 retail trade jobs were lost versus 44,000 last month.

  • 22,000 professional and business services jobs were lost versus 38,000 last month.

  • 52,000 education and health services jobs were added versus 17,000 added last month.

  • 21,000 leisure and hospitality jobs were lost versus 9,000 added last month.

  • 18,000 government jobs were lost versus 7,000 last month.

A total of 136,000 goods-producing jobs were lost (higher paying jobs). It was nearly a clean sweep again this month with education and health services jobs the only real winner for the month.

Note: some of the above categories overlap as shown in the preceding chart, so don't attempt to total them up.

Index of Aggregate Weekly Hours

Work hours were flat at 33.1. Short work weeks contribute to household problems.

Birth Death Model Revisions 2008

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Birth Death Model Revisions 2009

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Birth/Death Model Revisions

After the typical in January in which the Birth/Death Model revisions bore some semblance of reality, the birth/death numbers remain in deep outer space.

At this point in the cycle, birth/death numbers should have been massively contracting for months. The BLS is going to keep adding jobs through the entire recession in a complete display of incompetence.

The birth/death numbers have been a joke for at least two years now.

BLS Black Box

For those unfamiliar with the birth/death model, monthly jobs adjustments are made by the BLS based on economic assumptions about the birth and death of businesses (not individuals). Those assumptions are made according to estimates of where the BLS thinks we are in the economic cycle.

The BLS has admitted however, that their model will be wrong at economic turning points. And there is no doubt we are long past an economic turning point.

Here's the pertinent snip from the BLS on Birth/Death Methodology.

  • The net birth/death model component figures are unique to each month and exhibit a seasonal pattern that can result in negative adjustments in some months. These models do not attempt to correct for any other potential error sources in the CES estimates such as sampling error or design limitations.

  • Note that the net birth/death figures are not seasonally adjusted, and are applied to not seasonally adjusted monthly employment links to determine the final estimate.

  • 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.
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