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Wednesday, June 01, 2011 11:20 PM


Mood Swings: Economists Rush to Lower Payroll Estimates; What to Expect on Thursday and Friday


It's a never ending source of amusement that economists can never think in advance. Instead they revise estimates after the fact to be in line with the data.

Weekly Claims Numbers

On Thursday the weekly claims numbers come out. I am writing this Wednesday evening.

The number 4-week moving average of weekly unemployment claims is relatively easy to call. The number to beat is 438,500.

Over or Under?

Expect a drop (an improvement) in that number.

In light of recent data a drop may seem counter-intuitive but it is highly likely. The reason is simple. The last four weeks' claims numbers are, in order: 424K, 414K, 438K, and 478K.

478,000 drops off the list. It will be replaced by the numbers for the week ending May 28. Unless that number is greater than 478,000 the moving average will drop. I will take the under on 478,000 and thus the under (expecting a drop) in the moving average.

My guess is the 4-week average will be between 420,000 to 430,000. For an actual guess, I select 427,000.

If the number is lower expect the bulls to trump it up. Instead it will simply reflect an abnormally high number dropping off the average.

Monthly Payroll Report

Gaming the 4-week moving average of unemployment claims is the easy part. The tough part is gaming Friday's monthly payroll report.

Two days ago I would have taken the "way-under" in regards to economic estimate consensus. I meant to mention that in Market Ticker in regards to the Slowing Global Economy, but I forgot. Apologies offered.

However, in light of recent "unforeseen" by economists news, economists' estimates are now far lower.

Economists rush to mark down payrolls estimates

Please consider Economists rush to mark down payrolls estimates

Reflecting one of the largest one-day mood swings in recent memory, the downward revisions now place last month’s job growth at 125,000, the weakest since the 68,000 positions created in January and down from the average of 233,000 over the past three months.

As the sun rose on a steamy Wednesday in Washington, economists polled by MarketWatch had been looking for growth of 175,000 in nonfarm payrolls for May, a consensus figure representing a decline from a healthy 244,000 in April but still passing for strength. The nation’s unemployment rate was expected to reverse April’s slight uptick and fall to 8.9%.

First-time claims for unemployment benefits rocketed to 474,000 in late April — the highest level in nine months — from under 390,000 earlier in the month. Claims have since fallen back, coming in at 424,000 for the latest week.

Analysts tended to dismiss the claims data as an aberration. They saw continued strength in hiring, and some were hopeful that more than 50,000 jobs created by McDonald’s Corp. might offset any weakness in other sectors.

But this confidence cracked soon after data based on payrolls handled by Automatic Data Processing Inc. showed that only 38,000 private-sector jobs were created in May — extraordinarily weak given that economists were expecting a gain in the neighborhood of 175,000 jobs.

Adding fuel to the fire, later in the morning, the Institute for Supply Management’s May survey of factory supply managers was disappointing. The ISM factory index sank by nearly seven points to a 53.5% reading, the largest drop in nine years.
Who cut forecasts and by how much

  • “We have no choice but to revise down our payroll estimate” in light of the weak ISM and ADP reports, said the economic team at Bank of America Merrill Lynch, in a note announcing they had sliced their forecast to 125,000 nonfarm payrolls for May from the prior estimate of 165,000.
  • “We continue to expect a loss of 25,000 public-sector jobs but have reduced our forecast for private payrolls to 100,000 from 200,000,” said Julia Coronado, chief economist at BNP Paribas.
  • Economists at Goldman Sachs cut their forecast for Friday’s government employment report to show 100,000 nonfarm jobs added in May, down from 150,000 previously.
  • LaVorgna trimmed his forecast for nonfarm payrolls to 160,000 in May, down from a prior estimate of 225,000
  • Stone & McCarthy cut its forecast in half, to 100,000 jobs.
  • Jim O’Sullivan,chief economist at MF Global, cut his forecast for May jobs growth to 90,000 from 150,000.
  • IHS Global Insight now expects a gain of 135,000 nonfarm jobs in May, down from a forecast of 175,000 before the day’s data were released


Did the Lemmings Overshoot?

It is very difficult to know if the lemmings overshot or not. On one hand McDonald's allegedly added 50-70 thousand jobs and those jobs may affect the establishment survey. However, no one knows because the BLS in its infinite "wisdom" will not confirm who is in the survey.

Moreover, burger-flipping jobs tend to increase in summer months so one has to seasonally adjust. Then again, 50-75K is likely to be in excess of seasonal adjustments.

Finally, I do not know if McDonald's is in the ADP survey either. Regardless, picking a number is a crapshoot. It always is, but particularly true now.

The Real Deal

It really does not matter if McDonald’s added 50,000 jobs or not. Flipping burgers will not fuel a recovery. Moreover, even if McDonald’s did add that number of jobs, it is a one-time affair.

I wonder how many desperate engineers or recent college graduates took those jobs out of desperation. The sad fact of the matter is that unemployment has been dropping for a year based on burger-flipping jobs, part-time jobs, or people dropping out of the labor force.

Since April 2008 6,484,000 dropped out of the labor force. In the last year alone, 2,916,000 dropped out of the labor force.

For a discussion of exactly what questions the BLS asks to determine the unemployment rate, please see Reader Question Regarding "Dropping Out of the Workforce"; Implications of the Falling Participation Rate

Here's the real kicker. In the last year the number of people employed FELL by 292,000! Yet. miraculously the unemployment rate dropped nearly 1%. On that count, the unemployment rate should have risen at least 1%.

What to Expect on Friday?

Garbage. That's what.

Officially I will take the under on jobs and the over on the expected unemployment rate of 8.9%. For a guess on the latter, 9.2% seems reasonable on the data (and that was my opinion before the ISM and ADP reports). However, Lord only knows how many people the BLS might say dropped out of the labor force.

If burger flipping saves the day, it won't last.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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