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COLUMN 110, OCTOBER 1, 2004
(Copyright 2004 The Blacklisted Journalist) 

THE 'PLUG FACTOR'---THE 'RECOVERY' IS A STEW OF COOKED BOOKS

Subject: No New Jobs--cooked books
Date: Thu, 19 Aug 2004 10:41:29 -0700
From: "Peter Coyote" Peter@wdprod.com 
To: info@blacklistedjournalist.com 

This quote, from a non-liberal Financial newsletter, was sent to me by a serious investor friend with the note that Financial institutions need reliable data. This is serious.

THE PLUG FACTOR
by Dr. Kurt Richeb?cher

At first look, the May consumer income and outlays numbers - which we were eagerly awaiting last month - appear excellent: Incomes are up 0.6%, and spending is up even a full percentage point. At second look, after adjustment for inflation, the reality is pretty ugly. 

The increase in disposable income melts to less than 0.1% in real terms, and that of spending to 0.4%, of which well over half came from the burst in motor vehicle promotion. Spending on nondurable goods has been flat for two months. The whole of the extra increase accrued from a blip in spending on services.

Amazingly, this sharp slowdown in consumer spending, though lasting for half a year, has been met with flat denial all around. During the five months to May, it was up in real terms by $78 billion, or $186 billion annualized. This is less than half of the consumer spending growth in the second half of last year - $376 billion annualized. Meanwhile, we know that June was another horrible month for consumer spending. 

One important reason for the general indifference to this drastic reversal in consumer spending was apparently the fabulous job figures for the three months March-May that the Bureau of Labor Statistics (BLS) miraculously pulled out of the hat, reporting almost 1 million new jobs during these three months.

It shocked us to see how readily and uncritically research institutions, economists and media around the world 
accepted these numbers at face value, even though they came like a bolt from the blue in the face of otherwise rather mixed economic data. For the few who wanted to see, these numbers were bluntly suspect. 

It turned out that virtually two-thirds of the new jobs had come not from the survey, but from a new computer model. For decades, the BLS has aimed at small businesses when measuring job creation in times of recovery, especially those not captured by its established monthly survey. Until 2000, this statistical adjustment was fixed at 35,000 each month, called the "plug factor." 

The recent sudden jump in these figures towards 300,000 each month results from a computer model based on a calculated "net birth/death adjustment," which is supposed to measure how many jobs small firms have created and shuttered. In this way, the former monthly 35,000 figure exploded into numbers that are almost 10 times greater. 

For us, the sudden statistical spike in job creation during March-May was massively out of whack with prior numbers and other concurrent economic data to be credible. Then came June: 112,000 new jobs created, less than half the expected number. We never saw it mentioned that the net birth/death adjustment contributed 182,000 to this disappointing increase. Without it, employment would have fallen 70,000.

What all this means for the U.S. economy's prospects should be clear: The suddenly strong support from job and income growth looks very much like a mirage. To the contrary, sharply slower consumer spending is essentially exerting the opposite effect of spending is essentially exerting the opposite effect of depressing income growth.  ##


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