Massive revision will show recession was even worse

4 February 2010, by Rex Nutting (MarketWatch)

More than 8 million jobs lost since 2007, updated Labor data will show Friday

WASHINGTON (MarketWatch) -- On Friday, the government's official data on U.S. employment will be updated to reflect what everyone already feels: In terms of job losses, this has been the worst recession since the end of the World War II more than 60 years ago.

Instead of job losses of 7.2 million as currently reported, it'll be more like 8.1 million lost jobs, if the annual benchmark revision of payrolls through March 2009 comes in as had been estimated four months ago by the Bureau of Labor Statistics.

Most of the extra jobs lost -- numbering a projected 824,000 -- came in the first quarter of 2009, adding to the 2.07 million that have already been reported, the government has forecast.

What's more, the employment picture will likely look even worse after next year's revision, which will cover payrolls data running from April 2009 through March 2010.

The revisions to the establishment survey will be a "doozie," said Michael Gregory, economist for BMO Capital Markets.

After the revision, payrolls will have fallen 5.9% from the peak in December 2007 to December 2009, easily beating the post-World War II record decline of 5.2% set in 1948-49, he said. By comparison, payrolls fell by about 18% during the Great Depression.

Most commentators have already incorporated the payroll revision into their thinking. The Obama administration,Congress, the Federal Reserve and the private-sector have all recognized that more than 8 million jobs have been lost -- but the fact of the report could still come as a shock to some investors on Friday, when the revisions will be reported as part of the employment report for January.

Economists surveyed by MarketWatch are expecting payrolls to grow by a seasonally adjusted 25,000 in January, what would be just the second increase since the recession began 25 months earlier. The revision will not affect the nation's unemployment rate, which is derived from a separate survey of households. Read our complete economic calendar and consensus forecast.

Economists are expecting the official unemployment rate to remain at a seasonally adjusted 10% on the month. The broader unemployment rate, which also includes discouraged workers as well as underemployment, should be steady at 17.3%, economists said.

Not a shocker

Despite what you may have read, the payroll revision isn't a secret. It was first reported in October, when the Bureau of Labor Statistics estimated that the benchmark revision to the establishment survey would total an incredible negative 824,000 from April 2008 through March 2009. The actual revision will be announced on Friday.

Each year, the Bureau of Labor Statistics revises earlier estimates, based on monthly samples of hundreds of thousands of businesses, to incorporate information from tax records. The big issue for the revisions: How close the government was when it guessed how many new businesses would open and how many would close down?

From 2003 to 2007, the government's guesses were pretty good, averaging about 0.2% of payrolls. But in 2008, the BLS "birth-death" model fell apart with a 0.6% miss.

It turned out that the number of jobs created by new firms was much less than expected.

The government adopted the birth-death model to make its monthly estimates more accurate. The monthly payroll count is based on a representative survey of businesses, but the BLS cannot survey new businesses immediately because it doesn't know they exist.

It would, in other words, miss a lot of job creation if it didn't have a way of estimating how many new companies have been formed.

Similarly, it also cannot be sure whether a business that didn't respond to the survey is still in operation or just not returning the form. Statisticians at the BLS have to estimate how many firms go out of business.

Ultimately, new businesses show up in the tax records. And businesses that went out of business are excised from those records. Then, the government can check how close its estimates were to the actual payroll tax records.

It seems impossible to many people that any businesses at all are formed during recessions. That's just not so.

Even at the depth of the recession in the first quarter of 2009, 1.1 million jobs were created at new establishments. At the same time, however, 1.4 million jobs were lost at companies that closed their doors.


Rex Nutting is Washington bureau chief of MarketWatch.

More than 8 million jobs lost since 2007, updated Labor data will show Friday 4 February 2010 (MarketWatch) http://tinyurl.com/yjnutbo