Job Growth is on the rise.

[PIX]

For those of you who in the US who continue to use the recession crutch as a pulput against President
Bush, the Job Report will come out tomorrow for this quarter and might deal a blow to the same ol story
about 'ALL these people out of work'. The following text was acquired today from FTN Financial and gives
some insight to the current market and some things going on. I am also posting a trend graph for the last 20
years. The job market is getting better and is in a factual upswing and has been for 2 years.

THINGS YOU SHOULD KNOW ABOUT TOMORROW’S JOBS REPORT
No one in the world of fixed-income needs to be reminded how important the employment report is. In the past four
months, it has accounted for all of the biggest daily changes in yields. This month’s report has a few twists that made
the analysis even more challenging than usual, and could lead to some confusion after the release. The following is
offered in the interest of averting some of that confusion.
The estimate
The consensus estimate for payrolls is 120k, according
to a Bloomberg survey of 71 economists. But some of
these estimates allow for returning supermarket strikers
and some do not (see below). Further clouding the
picture, some economists are said to have posted low
“official” estimates while promoting higher whisper
numbers. It’s not clear what this is meant to accomplish,
but it has lead to some estimates that the true consensus
is 175k.
The strike
A grocery workers strike against Kroger and Safeway
ended in March, and approximately 75k workers returned
to their jobs (and to payrolls). It’s not clear how many of
the 25k replacement workers hired during the strike were
let go, but the general consensus is that the end of the
strike will boost payrolls by 50k.
Other labor market data
Given the size of nonfarm payrolls — approximately 103
million in January — a change of 100k amounts to about
0.1% of the total. That means that a forecast with
precision within 25-50k is a very precise forecast indeed.
But that is the kind of precision investors expect.
Economists turn to other data, including unemployment
claims, jobs-hard-to-get and jobs-plentiful indices from
the consumer confidence report, the ISM indices and
surveys by groups like Manpower and Challenger Grey &
Christmas for guidance. This month, the early release
date, April 2, means that much of these data were not
available in time for forecasting.
What was available were claims — stuck at about 340k
for the past three months — and the Manpower survey,
which calls for a big rise in hiring in the second quarter
of this year.
As for the ISM employment indices, Chicago was sharply
lower, but the ISM manufacturing index was up. The nonmanufacturing
index won’t be released until next week.
Relevance
As we have written in the past, some of these indicators
correlate well with payroll growth, while others are only
marginally informative. The best indicator is the nonmanufacturing
employment index, with an R2 of 0.54 since
1998. The second best is the manufacturing ISM
employment index, with an R2 of 0.38. The R2 can be
boosted considerably by using multiple variables, but the
best regressions tend to miss by fairly substantial margins
in any given month. (Substantial, that is, to investors who
demand accuracy of 0.05%, or 50k.)
To the best of our knowledge, there are no effective
leading indicators of employment. Even the manpower
survey appears to lag about a quarter behind the data, as
if CEOs are forecasting a pickup or decline in hiring next
quarter because they saw a pickup or decline this quarter.
This does not mean these data are useless, however,
because most are released in time to forecast the latest
report on a coincident basis. Even the Manpower survey,
which points to a big rise in second quarter hiring is useful
despite its lagging-indicator status, because it suggests
a pickup in hiring in the first quarter, presumably in
Friday’s report on the March employment situation.
Trends vs. pinpoint forecasts
Several Fed officials, including Greenspan, have
suggested that nonfarm payrolls will pop higher at some
point this year, but all insist they can’t say when this will
occur. Private sector economists are in a similar bind. As
the ancillary data suggest that payrolls should have
been rising 200k per month or more since the fourth
quarter, something has obviously not happened.

At some point, though, payrolls will almost certainly
strengthen. We say this with confidence for two reasons.
First, because the ancillary data measure the same thing
as the payroll survey, but from a different angle. The
reason there’s a high historical correlation is the same
as the reason there’s a high historical correlation between
measurements of something with a ruler marked in
inches and another marked in centimeters.
The second reason is that anecdotal reports suggest the
payroll survey is out of synch with reality. The latest such
story comes from a Market News Service piece on temp
employment services. According to a source, who had
recently attended an industry conference in Chicago, the
mood was upbeat, everyone agreed that hiring was strong
and everyone was perplexed that their sector in particular
(temp hiring) has been weak in recent payroll reports.
The unfortunate truth is that this evidence, both measured
and anecdotal, is a terrific guide to the strength of the
trend in payrolls, but its effectiveness fades significantly
when it comes to pinpoint forecasts of payrolls in any given
month. This is the most likely explanation of both the
persistent over-estimation of payrolls in the past four
months and the persistent whispers that payrolls will be
even stronger than forecast. One day, they will be.
- Chris Low, Chief Economist
FTN Financial
[email protected]