Comstock Funds

According to the headlines and the releases by the Bureau of Labor Statistics (BLS), payroll employment increased by a total of 947,000 in the last three months�353,000 in March, 346,000 in April and 248,000 in May. Since it is well known that this figure is based on an actual survey of a large number of establishments one might presume that the result is based on actual head counts. It turns out, however, that this is not the case. In fact, a large majority of the employment growth that was reported and so widely hailed in the last three months is based on a guess attributable to an arcane formula used by the BLS to estimate employment changes resulting from the birth and death of business establishments. In gathering the employment data the BLS samples about 160,000 businesses and government agencies of the 400,000 that have unemployment insurance tax accounts. The sample accounts for about one-third of all nonfarm payroll workers. In addition, however, the BLS uses something called the ARIMA time series model (also called the net birth/death model) to estimate employment changes resulting from business births and deaths that are not accounted for by other methods. The model reflects the actual residual births and deaths over the last five years. According to the BLS, �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�it is likely to remain as the most problematic part of the estimation process.� The problem is that for the three months ending in May the estimation model contributed a total of 618,000 of the 947,000 rise in payroll employment�153,000 in March, 270,000 in April and 195,000 in May. Thus for the three months, 65 percent of the total growth in employment is an estimate based on the formula, and only 35 percent were actually counted. Now this may be a completely valid procedure that reflects the real number of jobs added. But it also can be way off base and result in the creation of phantom jobs that don�t exist. Nobody knows, including the BLS. The agency itself states that the model would have some difficulty at turning points, and this period would seem to fall into that category. According to consumer surveys most people, answering on the basis of personal experience, feel that the labor picture is weak, and it is possible that this belief reflects more reality than the official numbers. We�re not saying that the numbers are phony, and we certainly appreciate the difficult task of the BLS statisticians in making the estimates. The problem is that when as much as two-thirds of the three-month growth in employment is the result of an educated guess we have to wonder whether it really happened. This is particularly so since the vast majority of investors, strategists and economists using this report are probably not aware that much of it is a guess. For more detail on this topic see www.bls.gov/web/cesbd.htm.