March Employment Report Preview
It is all about jobs, as I noted in my investing preview for this week.
This week's payroll report has two unique features:
- The markets will be closed. Unless you are trading Globex futures, you will have the weekend to digest and dissect the data.
- The BLS will be online, doing a webcast! This will provide another opportunity for those who do not understand the methodology to get some enlightenment. This group includes nearly everyone.
Here are some things we hope will be clarified:
- There is always job creation — always — even in the worst of times. Most analysts err by confusing net job changes with job creation. Understanding business dynamics is the key to analyzing the recovery, and no one does this….. no one.
- The Birth/Death model is only one part of the job creation estimate. It is smaller and much less important than the "imputation step" where the BLS infers new business births from responses in the sample.
- No one has a monopoly on truth when it comes to estimating employment. The BLS has one method for estimating job changes. Many private analysts (including us) have other strong approaches.
Estimates from Jobless Claims
There are a number of sources who discuss the net job change by using the initial jobless claims reports. One of our featured sources, Mark Thoma, cites 400K as the dividing line. Another top source, Calculated Risk, tracks the weekly changes, but notes that there is no way to infer the change in payroll jobs directly from the claims series.
We believe that by adding two other variables, you can make a good forecast of job changes. Other analysts also have strong methods.
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— 468K versus 468K. Ignore the improvement in recent weeks since these are
not in the survey period.
- 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 73.6, also unchanged from last month.
- We use the ISM manufacturing index, which will be released tomorrow morning. After today's disappointing Chicago PMI reading, I am going to assume 56.5 for the national ISM manufacturing index, the same as last month. While 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. In recent months we have been too
bearish. The BLS benchmark revisions suggest that we have been much
better than first thought. I am still working on a comparison with the final
Based upon the data, our estimate would be the same as last month, a net job loss of 51,000. There are some known idiosyncrasies this month. We know that temporary workers are being hired for the decennial census. While it is nice to have employment of any sort, most of us will adjust for the census increment. There may also be some weather-related distortions.
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 loss of 23K.
TrimTabs has another valuable approach — tax deposits. Their
forecast is for a stunning gain of 280,000 jobs. They attribute this roughly 2/3 to government (including census) and 1/3 to the private sector.
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 job loss of 52K
Briefing.com cites the consensus as
a gain of 190K and their own forecast is a gain of 75K.
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
Many pundits are suggesting that this employment number has to be "just right." If it is too strong, interest rates will move higher. If it is too weak, it will show that economic stimulus has failed. This interpretative spin would normally work well. I have often recommended shorting the market in front of the report, depending upon the Bearish Blogging Network to send some emails finding a reason to dismiss the results.
In this case, we can all take the day off — at least after watching the webcast. There will be plenty of time to review the data before Monday.
My own feeling is that strong is good for stocks, but my indicators do not yet show real economic strength.
UPDATE. Added 4/1/10 at 9:30 CDT. The ISM manufacturing report is one of the components of our estimate. The strong results, 59.6, improve prospects quite a bit. Our estimate is now for a net job change of near zero before factoring in the temporary census jobs. This translates into a gain of 130K or so.