MacroScope

Forecasters more accurate on U.S. payrolls: perhaps a good sign

June 7, 2013

Financial and economic forecasters have long been the punching bag of punters and traders for making spectacularly wrong calls. But a clutch of economists looked exceptionally good on Friday. Nine of them, or about 10 percent of the latest Reuters Polls sample on U.S. non-farm payrolls, got the net number of new jobs created in May exactly right at 175,000. And a whole lot of them came very close.

For a survey of companies conducted by the Bureau of Labor Statistics that itself has a margin of error of plus or minus 100,000 this is no small achievement – or stroke of luck.

But it may also be a good sign that jobs growth is getting more steady, a much more stable target to try and pin down each month. The range of forecasts provided – from 125,000 jobs to 210,000 – was also the narrowest so far this year.

While the growth rate needs to accelerate to create meaningful change in the jobs market, most say this is a good sign for the economy, most specifically for the unemployed who are actively looking for work.

That also may mean that the Federal Reserve could soon begin trimming down some of the $85 billion in bond purchases it is conducting each month to stimulate an economy running on near-zero interest rates. But it is still far from certain that will happen any time soon.

Following are comments on the latest data and what they mean for policy from some of the forecasters who called it exactly right.

(Reporting by Ashrith Rao Doddi)

 

The moderate recovery in the labor market continued last month. While non-farm payrolls gains were slightly stronger than in April, they failed to take the unoffical hurdle of 200k many FOMC members have set for considering tapering off QE3.

The most important driver of job creation is investment spending. Here the picture has been relatively stable: residential construction enjoys a strong upswing, nonresidential construction is marked by stagnation while capex spending increases at a solid clip. Taken together, this speaks for further steady if unremarkable gains in payrolls over the coming months which, however, probably do not meet the Fed’s criterion of a “significant” improvement in the labor market. We therefore expect the Fed to continue QE3 at its current pace until towards the end of 2013 before reducing purchases.”

– Christoph Balz, Commerzbank

 

Average payroll growth of 162,000 per month during the last two months or of 189,000 during the first five months of this year represents a remarkable robust pace given the substantial fiscal headwind. Nevertheless in my opinion there exists a risk, that the fiscal headwinds will cause a more pronounced slowdown in business activity later in the year. Therefore the Fed will in my view wait several more months to see whether the restraining forces of the tax increases and expenditure cuts really do not pose a risk for the recovery anymore. Regarding inflation, I expect further declines in core CPI and a the core PCE deflator to stay near historical lows or slide even lower. In this environment the Fed will wait till the fourth quarter of this (before) it decides to reduce asset purchases.

– Andreas Busch, Bantleon Bank

By revealing a decent rise in payroll employment but a small rise in the unemployment rate, May’s Employment Report had something for everyone. Our reading is that it leaves the Fed on track to taper the pace of its monthly asset purchases later this year.

The weak global economy is still taking a toll, with manufacturing payrolls falling by 8,000 last month. And the squeeze on government spending is also to blame as government payrolls fell by 3,000. This would have been worse if local governments hadn’t added 13,000 workers. Elsewhere, the 179,000 rise in private services payrolls is what we would expect in an economy growing by around 2% a year. Average hours worked were stable at 34.5 and average hourly earnings were unchanged.

The recent survey evidence suggests that payrolls may weaken a bit in the coming months. But we don’t think it will be long before they are rising by around 180,000 a month again. If that’s the case, then when the Fed meets in September it will probably choose to trim the pace of its monthly asset purchases.

– Paul Dales, Capital Economics

 

… we do not see the number as providing clarity on the state of improvement in labor markets and the potential for a reduction in the pace of asset purchases. Improvement in labor markets remains modest, on balance. We do see labor market trends, income, and hours worked, as indicating the economy is slowing in Q2. In our view, this means the Fed is unlikely to take a decision to taper purchases at its June meeting, preferring rather to see several more employment reports before the September FOMC meeting. We expect real GDP growth to slow to 1.5% in Q2 due to the delayed effects of higher tax rates on consumption and sequester budget cuts that took place beginning March 1, and we see a softer rebound in activity in the second half of the year than FOMC policymakers currently project. Our forecast is for real growth of 2.0% in the second half of the year while the Fed is forecasting a stronger rebound to 3.0%. Our baseline outlook is that the Fed will maintain its purchase rate of $85bn per month through year-end before tapering purchases in Q1. However, our outlook remains data-dependent and we look to the coming months to understand the strength in labor markets and the extent of the fiscal policy drag on economic activity.

– Michael Gapen, Barclays Capital

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