The Bureau of Labor Statistics (BLS) recently announced that they will be making downward benchmark revisions to past monthly nonfarm employment data that casts doubt on the validity of the recent figures as well. As we will explain, it is highly likely that substantially more jobs are now being lost than is currently reported.

The BLS makes annual revisions to the previously announced payroll reports to account for job increases or decreases that were not picked up in the initial data.  The main reason for the differences in the preliminary and final reports is the difficulty in getting numbers from the many small and medium sized business and accounting for new startups and firms going out of business.  To make an educated guess at the data that they are missing, the BLS uses something called the ARIMA time series model (commonly called the birth/death model) to estimate employment changes resulting from business births and deaths that are not accounted for by other methods.  The model is based on the actual births and deaths over the five prior years.

As you can imagine, when the prior five years encompassed a period of economic expansion, the application of these numbers to a period of recession can result in a substantial overestimation of job changes, and that is evidently what happened recently.  The BLS candidly acknowledges this and states that it is "likely to have some difficulty producing reliable estimates at economic turning points or during periods when there are sudden changes in trend."

In the current instance the BLS announced that preliminary tabulations indicated they would have to reduce the estimate of total nonfarm employment by about 824,000 for the year ended March 31, 2009.  On average, therefore, the net change in payrolls for the period was overstated by about 68,000 per month.  Interestingly enough, the birth/death adjustment had added about 717,000 jobs during the same period.  So it's apparent that the benchmark revision will more than wipe out the entire amount added by the model.

What does this mean for the period following March 31, 2009, which will not be revised until next October?  For the six months since March 31^st the birth/death adjustment has added 815,000 jobs, an average of 135,000 per month.  Since small and medium sized firms are suffering from severe credit restrictions, they are much more likely to have reduced employment significantly rather to have added that many jobs.  That means current monthly job losses may be running as much as 135,000 higher than is currently being reported.  While we won't know the true number for another year, those being laid off will know, and they will be reducing their spending accordingly.  The Fed certainly knows what's happening and that's one reason they are promising near-zero interest rates indefinitely.

When we combine the weak job numbers with declining wages, tight credit, record household debt and the impending explosion of home foreclosures, the chances of a sustainable economic recovery looks exceedingly slim.  Yet, for the third time in this decade the stock market is off on another binge not based on reality.  Such flights into fantasy always end badly.