More than 80 economists have weighed in on this Friday’s Nonfarm Payrolls report, with estimates ranging from a low of 125,000 new jobs to 275,000.
Banks admit this is a very difficult number to predict. Results recently have been subject to sharp revisions, with six of the past seven months revised upwards by an average of 54,000 people.
“Payrolls are notoriously volatile month to month, and they are prone to substantial upward revision,” Deutsche Bank Chief Economist Joseph LaVorgna says.
For the first time, Business Insider is modelling its own forecast based on various historical data points.
You can scroll down to the bottom of the post for our official projection, but first you should read our methodology here.
To construct the estimate, Business Insider went over several key data points, including commercial and industrial loans, the seasonally adjusted annual rate of light vehicle sales, initial unemployment claims, five regional Federal Reserve employment sub-indexes, the Citi U.S. Surprise Index, and past economist accuracy when predicting NFP.
Citi Surprise Index & Economist Accuracy
The first indicator blended into the model is the Citi Surprise Index, a measure of economist accuracy. The index is a measure of how close economist predictions are to reality: the higher the number, the further behind the curve analysts are in judging the strength of the strength of the economy.
Business Insider broke up the index into pieces to look at specific economic periods and arcs, targeting moments when analysts continued to diverge from actual economic performance. Over the past seven months, economists have generally underestimated the pace of job growth.
In fact, the divergence looks substantially similar graphically to the start of the financial crisis in 2008, when job losses racked the U.S. but the Bloomberg median survey showed more optimistic predictions.
At present, the index shows economic activity continues to positively outpace economist predictions by a large margin, standing at 49.9 on the last trading day of February.
To better look into the cloud of data points, Business Insider limited the difference between expectations and actual nonfarm results to times when the Citi Index was within 15 points of 49.9 and -49.9. On average, economists were 38 per cent below the actual result.
Photo: Eric Platt/Business Insider, Data: Federal Reserve/Bloomberg
*The February 29, 2008 data point was not included in the average because of skew associated with passing through the zero mark.
Commercial and Industrial Loans
The closest correlated data point our analysis showed was Commercial and Industrial Loans, which are released weekly in the Federal Reserve’s H.8 Report.
When testing C&I loan data correlations against Nonfarm Payroll gains, a linear regression calculated an R-square of 0.77, the highest single indicator.
After the 2008 financial crisis, credit, on a monthly per cent change basis, contracted at a much greater pace than nonfarm payrolls. However, with a bump in economic activity, credit has surged so fast that the data has once again diverged.
The weighting for C&I loans was reduced in the model to represent the departure from the adjacent movements. Had loans made up originally set projections, Business Insider’s NFP estimate would surpass 300,000.
Nonetheless, the directional movement of the lending indicates that businesses are investing and hiring again (good news for the NFP number).
Photo: Eric Platt/Business Insider, Data: Federal Reserve
Regional Fed Activity
First up is a close look at regional employment activity as measured by five Federal Reserve Districts: New York, Philadelphia, Kansas City, Dallas, and Richmond.
Nearly across the board, regional employment improved — which followed closely to reports out of the Fed’s Beige Book. In the Fifth District, which includes the District of Columbia, Maryland, Virginia, North Carolina, South Carolina and parts of West Virginia, expectations for new hiring advanced sharply.
“District manufacturers’ intentions to expand hiring were more bullish in February,” the Richmond Fed said last week in its monthly report. “The expected manufacturing employment index jumped twelve points to 32 and the average workweek indicator added three points to 10. In addition, the index of expected wages rose seven points to 26.”
Regional Fed momentum tends to show coming trends, with Total Nonfarm Payrolls on a two to three quarter lag.
A regression of the data with ultimate payrolls showed below average correlation.
Photo: Eric Platt/Business Insider, Data: Regional Federal Reserves
Light Vehicle Sales
Auto sales in February perked up to some of their highest levels in years, topping a 15 million annual pace. Forecasters pegged the rate between 14.0 and 14.4 million leading up to the announcement, which surprised the Street.
Interestingly, in recent months both nonfarm payrolls and vehicle sales have moved in tandem. The SAAR increased by 6.9 per cent during the most recent month.
Caveat lector: Purchases of automobiles have been on the rise after hitting bottom — meaning the correlation to nonfarm payrolls may have less to do with an improving employment picture and moreso with drivers needing to replace their current mode of transport.
That said, if the pace continues this month, it shows another healthy increase in the U.S. workforce.
Photo: Eric Platt/Business Insider, Data: Federal Reserve
Based on our blend of the above, which weighs the data by correlation and recent predictive power, the data points to a sharp gain in February: a nonfarm payroll expansion of 285,000 jobs.
The projection is well above the consensus Street estimate, which calls for a 210,000 new jobs. If the model is accurate, this will be the best nonfarm payroll report in six years — the last time the economy expanded by more than 300,000 jobs was in February 2006.
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