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  • Writer's pictureJonathan Wilmot

It Ain't Necessarily So

Last Friday's May Non-Farm Payroll report looked like a blockbuster (plus 272,000 on the month). And private payroll growth looks to be re-accelerating, or at least stabilising.

And yet the Household Survey measure of employment fell 400,000 on the month and is virtually flat over the past year, when Non-farm Payrolls are estimated to have risen by 2.8 million.

But as the Bureau of Labour Statistics explains below, non-farm payrolls contain an estimate of new-business formation (which has been unusually strong since COVID).


That estimate assumes, first, that the number of new businesses formed in any month (business births) is equal to the number of businesses that went bankrupt in the current month (business deaths) and second, adds a trend adjustment reflecting new business formation over the past 5 years. So in any month in which bankruptcies spike, and new business formation slows right down, the published payroll data will overstate true employment growth. And paradoxically, just when the labour market's most economically sensitive component is actually taking a turn for the worse.


We don't know for sure that this happened in May but we do know that bankruptcy filings have been trending higher recently (they were up 16% year on year in Q1:2024). Over the same period New Business Formations were down 3-5%.


So it is possible but by no means certain that business deaths have accelerated recently while new business formation has slumped. Which means that markets may be exagerating the extent to which last friday's data pushes back the time ttable for rate cuts.


Note: here is the relevant information about methodology from the BLS>


"Another major source of nonsampling error in the establishment survey is the

inability to capture, on a timely basis, employment generated by new firms. To

correct for this systematic underestimation of employment growth, an estimation

procedure with two components is used to account for business births. The first

component excludes employment losses from business deaths from sample-based

estimation in order to offset the missing employment gains from business births.

This is incorporated into the sample-based estimation procedure by simply not

reflecting sample units going out of business, but imputing to them the same

employment trend as the other firms in the sample. This procedure accounts for

most of the net birth/death employment.


The second component is an ARIMA time series model designed to estimate the

residual net birth/death employment not accounted for by the imputation. The

historical time series used to create and test the ARIMA model was derived from

the unemployment insurance universe micro-level database and reflects the actual

residual net of births and deaths over the past 5 years.


The sample-based estimates from the establishment survey are adjusted once a

year (on a lagged basis) to universe counts of payroll employment obtained from

administrative records of the unemployment insurance program. The difference

between the March sample-based employment estimates and the March universe counts

is known as a benchmark revision, and serves as a rough proxy for total survey

error. Benchmarks also incorporate changes in the classification of industries

when necessary."

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