A research report from Morningside Hill Capital sourced from Zerohedge shows that 93% of the jobs ‘created’ since 2008 were Birth/Death model estimates. While some portion of those jobs were no doubt legitimately created, the issue is over-estimation of jobs created by new businesses net of jobs lost from failed businesses. As it turns out, most of the job growth that has been reported by the Government since 2008 – and which in turn fueled some massive stock rallies – never existed.
Ronald Reagan’s administration was the ‘culprit’ behind the creation of the Birth/Death model because apparently Reagan was complaining that the BLS was undercounting the jobs he ‘created’ (from the link above, pg 11).
The source of estimation error derived from the methodology used by the Census Bureau is highly flawed because it extrapolates B/D growth estimates based on historical experience. When the economic activity in the current period is below the historical rate of economic activity (real economic activity, not inflation-generated growth or growth fashioned from data manipulation), the slow-down in new business formation that occurs in reality is not picked up by the B/D model.
This post was published at Investment Research Dynamics on June 3, 2017.