Friday's employment situation report once again is the focus of the financial markets. With the perception that the economy has hit another "soft patch" the report assumes special significance.
Corporate earnings have been excellent, but there is continuing skepticism about economic growth. Since everyone agrees about the importance of jobs, the monthly employment situation report looms large.
Each month there are several different estimates of job growth. The BLS has an approach, reflecting one methodology. This method, which is very strong within the context of the approach, is regarded as the "official" verdict on monthly employment growth.
This is a mistake, since other private methods provide equally valuable insights on the employment situation.
Let me start with some background on my approach.
Our Own Estimate
The non-farm payroll report is based upon a monthly survey, attempting to estimate all of the 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)?
This is not a forecast, per se, since we do not posit any causal relationship among these variables. 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. The current rate is 404K, up slightly from last month.
- 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 they are worried, it shows up in sentiment. It is a good concurrent indicator. The Michigan index is now at 69.8, up two points from last month, but down from 77.5 in February.
- We use the ISM manufacturing index. This is 60.4, down slightly from levels of the last three months. This is the most bullish of the various indicators.
Our long-term 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.
Based upon the data, our estimate is for a gain of only 56K jobs.
I think my approach might be a bit too bearish. Consumer confidence is usually a good refleciton of job growth, but right now it probably also reflects high gas prices. We have not had enough data to do a good statistical control for this.
Readers should also keep in mind that the BLS estimate has a 90% confidence interval (just for sampling error) of+/- 100K jobs. Even if Friday's report seems good, I am suspicious because of the weak nature of the other economic data.
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.
All of us are dealing with unusual circumstances because of the census hiring and later layoffs. This is not something that fits nicely into a model. The various forecasts should all be interpreted within that framework.
ADP has proprietary data because of its payroll management business. Looking only at private sector jobs -- no government, no census effect, ADP sees gains of 179,000 jobs.
TrimTabs has another valuable approach -- tax deposits. Their forecast is a gain of 181K.
Briefing.com cites the consensus as a gain of 200K, the same as their own forecast.
To summarize briefly, the market incorrectly focuses on predicting the BLS preliminary estimate -- including 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.
Jobs data is so important -- and we are all so interested -- that we seize upon whatever information we have, even when we know the limitations.
As usual, I am cautious about the jobs report. Given all of the other economic data, it is hard to believe that we will have brisk job growth. My guess is that other market participants will see this the same way. In fact, the market may not actually be expecting very much.
I am still looking for a good entry point for some accounts. Waiting until after the number on Friday may provide some good short-term timing.