The monthly employment report is widely regarded as providing the most important economic data. It makes sense.
- Job growth and the unemployment rate are important indicators of the economic recovery (or lack thereof).
- Without jobs, how can there be solid consumption?
- Political fortunes will swing on the extent of job losses and new job creation.
Stocks have rallied without significant job growth because the depression forecasts did not come true and profits continued to grow. Most observers feel that further stock appreciation depends upon economic growth.
No wonder we are all interested in jobs. Each month I do a preview of the employment situation report based upon my team's statistical analysis.
Our Own Estimate
The non-farm payroll report is based upon a monthly survey, attempting to estimate the total of all payroll jobs for the week including the 12th of the month. Each month my team asks the question, "What change in payroll employment would be consistent with other economic data from the same time period (the week including the 12th of the prior month)?
My answer to this question is not a forecast, per se, since we do not posit any causal relationship among the variables in our model. They are all concurrent 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 job losses. This has decreased a bit --- 464K versus 484K last month. This value has declined significantly from the five-handle, but is still at distrubing levels.
- 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 strongly influenced by employment. When people have lost jobs, or know others who have, they get worried. It is a very good concurrent indicator. The Michigan index was down a touch (after a sharp decline in July) to 68.2, down from 68.9 last month.
- We use the ISM manufacturing index. This is 54.4, down from 56.3 last month. Despite the decline, this remains the most bullish of the various indicators. Most people do not know much about interpreting this index, which is still indicating GDP growth of over 4%.
Our long-term preview record has been very good, especially when compared to the final revised data. This makes sense because our model was derived from the final data. Our approach also makes logical sense, because it involves some factors related to jobs lost, and some related to job creation.
For the current month, our estimate is for a loss of over 110K jobs overall This is a very pessimistic estimate, weaker than the other sources.
I have noted that the preliminary reports have been running "hot" by about 100K jobs, a problem I discussed in this article. This was not true in Q409. You must also keep in mind that the BLS estimate has a 90% confidence interval (just for sampling error) of+/- 100K jobs. There is a wide range of possibilities for Friday's report.
Other Forecasts
It is always interesting to compare the job forecasts from different sources. We follow several because of the 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 loss of 39,000 private sector jobs.
TrimTabs has another valuable approach -- tax deposits. Their forecast is a loss of 65,000 jobs. This includes a decline in census jobs of about 78K, so the private sector jobs show an increase.
Briefing.com cites the consensus as unchanged for the private sector and their own private sector forecast is a loss of 18K. There is still some distortion in the data from the end of the temporary census jobs..
To summarize briefly, the market incorrectly focuses on predicting the BLS preliminary estimate -- mostly ignoring the 100K confidence interval, the seasonal adjustments, and the benchmark revisions. I am probably the strongest supporter of BLS methodology and integrity, but I still see their approach as only one method out of many.
The jobs report is so important -- and we are all so interested -- that we seize upon whatever information we have, even when we should accept the limitations.
Investment Implications
I am not trading around this week's number for two reasons.
- The current attitude is that weak data will prompt aggressive Fed action, perhaps even including buying a range of assets in Japan-like fashion. I think that the Fed is determined to fight economic weakness, but it is not going to buy stocks. It is a confusing situation.
- The market sold off on today's weak ADP report. Who knows what is really expected?
If I were going to trade, I would be short going into the number. No matter what is reported, the negative spinners always seem to out-duel the mainstream commentators. The report is so complex and the belief in conspiracy so ingrained that you can dismiss a positive report in a few words. Watch for Rick Santelli to ask "What was the birth death adjustment?"
