Friday's employment situation report will be important economically and politically. There is a wide error band on the results - -something that is rarely acknowledged in popular reports. I recommend the viewpoint that this is one of several efforts to estimate the jobs picture. The BLS tries to estimate all of the payroll jobs in one month and subtract the prior month's estimate. With 130 million jobs, even a good estimate of each month leads to a large error band - -more than 100K jobs.
Meanwhile, most observers overreact to small changes in the employment picture, or small deviations from expectations. It is the most complicated, least understood, and most maligned of all government reports.
The BLS is trying to address this problem. For the second straight month, the BLS will host a webcast to discuss employment information. This time it will be delayed until Tuesday, May 11th. The last discussion covered many points of interest to serious analysts. This is a good effort on the part of the BLS.
This month features a very wide range of estimates. All are worth consideration.
Our Own Estimate
Each month we ask the question, "What change in payroll employment would be consistent with other economic data from the same time period (the middle of the prior month)?
This is not a forecast, per se, since we do not posit any causal relationship among these variables. They are all concomitant indicators of economic activity.
- We use the four-week moving average of initial unemployment claims, culminating in the week of the employment survey. This is the best direct indicator of new lob losses. This has remained the same during the last month--- 461K versus 468K.
- We look at the University of Michigan sentiment survey, which we find to be more useful than the Conference Board's sentiment index. Michigan uses a panel, where some families are carried over from month to month. This is a good technique. Sentiment is influenced by employment. When people have lost jobs, or are worried about losing jobs, it shows up in sentiment. It is a good concurrent indicator. The Michigan index is now at 72.2, down a touch from last month.
- We use the ISM manufacturing index, 60.4, up slightly from last month. This is a strongly bullish value for the overall economy, it is only one component of the employment picture.
Our long-term record has been pretty good, especially when compared to the final revised data. This makes sense because our model was derived from the final data. Our approach makes logical sense, because it involves some factors related to jobs lost, and some related to job creation.
Based upon the data, our estimate is a small gain of 11,000 jobs. Because of the known hiring of census workers, I will adjust that a bit and expect a gain of 80,000. While it is nice to have employment of any sort, most forecasters will adjust for the census increment. Those interpreting the report may discount these jobs as temporary and low-paying.
Other Forecasts
It is always interesting to compare the job forecasts from different sources. We follow several because of the interesting and widely varying methods they use. A wise interpretation would be to consider all of these disparate sources of information.
ADP has proprietary data because of its payroll management business. Looking only at private sector jobs -- no government, no census effect, ADP sees a gain of 32,000 jobs.
TrimTabs has another valuable approach -- tax deposits. Their forecast is a gain of 262,000 jobs.
WANTED Technologies adds a valuable and different perspective -- looking at job changes from data concerning online ads, a source that others miss. Their article also discusses other interesting factors in the estimate. They forecast a gain of 220,000 jobs.
Briefing.com cites the consensus as a gain of 187K and their own forecast is a gain of 200K.
All of these sources are valuable. The 90% confidence interval on the BLS estimate, something that no mainstream media sources report, is +/- 100K or so. And that is after revisions and benchmarking. It is a survey -- a good one -- but it has an error band.
Investment and Trading Take
At the start of the week it seemed like the employment number would be the most important data. It probably still is in a substantive sense, despite the rest of the news flow. Since I am not looking for a strong number, that would normally be a negative. On the other hand, a weak report is negative for the dollar, and the strong dollar has been a negative for stocks.
Friday morning will also include the final German vote on the Greek bailout. The employment report -- for once -- may be overshadowed.
To summarize, there are too many cross-currents for a clear trade on employment. If the market rallies tomorrow, I might reconsider. I try to be specific, but part of forecasting is recognizing when things are too uncertain for a good call.
