Thursday, October 04, 2012

Employment Situation Preview

by Calculated Risk on 10/04/2012 03:47:00 PM

On Friday, at 8:30 AM ET, the BLS will release the employment report for September. The consensus is for an increase of 113,000 non-farm payroll jobs in September, slightly more than the 96,000 payroll jobs added in August. The consensus is for the unemployment rate to be unchanged at 8.1%.

Note: Last week analysts at Nomura pointed a possible one time issue: "We expect the Chicago teacher strike to reduce local government payrolls by roughly 25k in September ...". If that is correct, those jobs will be added back in October.

Also, there is a strong possibility that the seasonal factors are still a little distorted by the deep recession and financial crisis - this is the third year in a row we've some late spring weakness. In 2010, payrolls picked up in October following a weak period (looking at the data ex-Census), in 2011, payrolls picked up in September. If there is a seasonal distortion, the next few months will probably see some increase too.

Here is a summary of recent data:

• The ADP employment report showed an increase of 162,000 private sector payroll jobs in September. Over the last four months, the ADP report has averaged 170,000 private sector payroll jobs added per month compared to only 109,000 private sector jobs added per month in the BLS report over the same period (September not released). This would seem to suggest that the consensus for the increase in total payroll employment is too low. However the ADP report hasn't been very useful in predicting the BLS report for any one month.

• The ISM manufacturing employment index increased in September to 54.7%, up from 51.6% in August. A historical correlation between the ISM manufacturing employment index and the BLS employment report for manufacturing, suggests that private sector BLS reported payroll jobs for manufacturing increased about 6,000 in September.

The ISM non-manufacturing (service) employment index decreased in September to 51.1%, down from 53.8% in August. A historical correlation between the ISM non-manufacturing employment index and the BLS employment report for services, suggests that private sector BLS reported payroll jobs for services increased about 94,000 in September.

Added together, the ISM reports suggests about 100,000 jobs added in September.

Initial weekly unemployment claims averaged about 373,000 in September, up slightly from the August average - but below the 382,000 average for April, May and June. This was about the same level as in the January, February and March period when the BLS reported an average of 226,000 payroll jobs added per month.

For the BLS reference week (includes the 12th of the month), initial claims were at 385,000; up from 374,000 during the reference week in August.

• The final September Reuters / University of Michigan consumer sentiment index increased to 79.2, up from the August reading of 74.3. This is frequently coincident with changes in the labor market, but also strongly related to gasoline prices and other factors. This might suggest some increase in employment, but the level still suggests a weak labor market.

• The small business index from Intuit showed 40,000 payroll jobs added, down from 50,000 in August.

• And on the unemployment rate from Gallup: U.S. Unadjusted Unemployment Rate at 7.9% in September

U.S. unemployment, as measured by Gallup without seasonal adjustment, was 7.9% for the month of September, unchanged from 7.9% measured in mid-September but down slightly from 8.1% for the month of August. Gallup's seasonally adjusted September unemployment rate was 8.1%, unchanged from August.
Note: Gallup only recently has been providing a seasonally adjusted estimate for the unemployment rate, so use with caution (Gallup provides some caveats). Last September, the BLS reported the unemployment rate at 9.0%, and Gallup's seasonally adjusted rate was 8.9%. Note: So far the Gallup numbers haven't been very useful in predicting the BLS unemployment rate.

• Conclusion: The ISM manufacturing and service reports suggest a gain of around 100,000 payroll jobs, and the ADP report (private only) was at 162,000. The ISM is below the consensus, and the ADP is above. Initial weekly unemployment claims were near the low for the year during August, but the reference week was higher.

Another negative is the weak small business numbers from Intuit. Also the Chicago teacher strike probably reduced government employment.

As I mentioned above, there is some chance the seasonal factors have been distorted by the severe recession, and that might mean a higher than expected payroll number.

Merrill Lynch analysts are taking the under:
We expect yet another soft payroll report with job growth of only 90,000 in September and an increase in the unemployment rate to 8.2%.
Tim Duy is taking the over, see: Fed Watch: Data Update
I tend to think that attempting to forecast the monthly change in payrolls is a fool's game. Simply too much month-to-month noise. With that caveat in mind, my quick and dirty estimate (and quite wrong last month) for tomorrow is 139k; the consensus forecast is 113k.
I could make an argument for either the over or the under, but I think I'll take the under this month (under 113,000 payroll jobs added).