MacroScope

After a “significantly better than expected” ADP employment report, Goldman Sachs has raised its estimate to 200,000 for the U.S. Labor Department’s December nonfarm payroll report due Friday, the firm’s team of economists said. Separately, initial jobless claims were higher than expected for the most recent week, but the Labor Department reported some holiday distortions, the economists noted. “Overall, the data since our preliminary estimate last Friday have been strong enough to prompt us to revise up our forecast for nonfarm payrolls to 200,000,” the economists concluded.

Goldman wasn’t the only firm to revise its estimates. Jeoff Hall, Thomson Reuters’ resident economist, counted as many as five, though not all of the forecast changes hinged solely on ADP.

The ADP report showed private payrolls expanded by 215,000 jobs in December, easily topping a median forecast of 140,000. Initial jobless claims totaled 372,000 in the week ended December 29, slightly more than expected.

Medium-sized establishments accounted for the largest share of the ADP gain, Goldman’s economists observed. By sector, construction employment rose by an unusually large 39,000 –  the largest monthly gain since 2006 – while employment in trade and transportation employment (+53,000) and professional and  business services (+37,000) also rose, they said. In addition to the better-than-expected December figure, the November gain in private jobs was revised upward from 118,000 to 148,000, they noted.

“As a result of the stronger-than-expected ADP data, the increase in the manufacturing ISM employment index, and a solid gain in online help-wanted advertising, we are revising our forecast for the change in December nonfarm payrolls to +200,000 from +175,000. Our forecast for the unemployment rate stays at 7.7 percent,” Goldman’s economists said.

The U.S. jobless rate, currently at 7.7 percent, remains elevated by historical standards. But it has fallen sharply from a peak of 10 percent in October 2009. However, that decline could soon grind to a halt, according to a recent paper from the San Francisco Federal Reserve.

Its authors argue that, because the slow but steady decline in the jobless rate has been in part due to slippage in the labor participation rate that is more a product of the business cycle than long-run demographic trends, as the Bureau of Labor Statistics presumes.

In January, the U.S. Bureau of Labor Statistics significantly reduced its projections for medium-term labor force participation. The revision implies that recent participation declines have largely been due to long-term trends rather than business-cycle effects. However, as the economy recovers, some discouraged workers may return to the labor force, boosting participation beyond the Bureau’s forecast. Given current job creation rates, if workers who want a job but are not actively looking join the labor force, the unemployment rate could stop falling in the short term.

As traders and economists hash over the sharp and unexpected drop in the U.S.jobless rate to 7.8 percent, they might do well to review some key data points that offered early hints that at least some households were seeing improvement in the labor market. Wall Street analysts in a Reuters poll had forecast a rise in the unemployment rate to 8.2 percent.

Even as big companies were laying off more workers or at least holding back on hiring, The Conference Board’s consumer confidence data showed workers felt more encouraged about finding jobs. The Thomson Reuters/University of Michigan survey depicted a late summer upturn in consumer mood even as gasoline prices remained high. The latest ADP report, with all its perceived flaws, indicated a consistent, moderate acceleration in hiring among small- and mid-sized companies since late spring even though big firms seemed reluctant to expand their payrolls.

The graph below shows confidence improving as job prospects brighten.

U.S. non-farm payrolls have come in below the Reuters Poll consensus for the past four months, the longest streak since an eight-month period in 2008-09 when the U.S. was in the depths of recession and, at one point, losing more than half a million jobs a month.

Compared with a few years ago when there was a very wild range of forecasts on a given jobs report — the widest spread polled since the financial crisis began was 575,000 for the May 2010 data — economists are now huddling together in a pessimistic pack.

For the July data, due out at 1230 GMT, the range of forecasts in the Reuters Poll (on a consensus of 100,000) has narrowed to a 107,000 spread between highest and lowest, compared with 132,000 for the June data.

(Corrects to show CRT is not a primary dealer)

Bond bulls are ready to charge after Friday’s July U.S. employment data, according to a survey by Ian Lyngen, senior government bond strategist at primary dealer CRT Capital Group.

Says Lyngen:

Despite the vacation season and the multitude of ‘out of office’ responses we got, participation in this month’s survey was above-average and consistent with a market that’s engaged for the big policy/data events of the summer. As for the results of the survey, in a word: BULLISH.

Lyngen argued the survey results were the most bullish since November 2010, a point that was followed by a selloff that brought 10-year yields from 2.55 percent to 3.75 percent over the following four months.

The “big wildcard” in making July payroll projections is the size of the swing in public school teachers and other school workers.

Because of the size of teacher layoffs and the effect of the July 4th holiday on the data, the July seasonal adjustment factor can vary significantly from one year to the next, and the variation can be extreme, says Ward McCarthy, managing director and chief financial economist at Jefferies & Co in New York.

Many public school teachers, in addition to some other public school employees, are hired on a ten-month calendar that runs from September through June, large-scale layoffs occurring in July and large-scale hiring occurring in September.

The past year of forecasting U.S. payroll growth marks a bumpy road of U-turns on the timing of an elusive turning point to sustainable recovery, an analysis of Reuters polls shows.

In early 2011, an overwhelming majority of economists — 48 of 52 in the April poll and 38 of 46 in the May poll — said that turning point already had been reached.

More than a year later, it still seems a way off.

The U.S. economy added jobs at a monthly rate of 165,000 so far in 2012, far short of the 200,000 most say is representative of strong growth in a recovering economy.

How bad is the U.S. employment situation? The Labor Department’s tally for March, which showed only 120,000 new jobs were created, raised doubts about the sustainability of a recent pick up in job growth. But to get a broader sense of what things are really like it helps to put things in a longer-term perspective.

Even with the 3.6 million new jobs created during the recovery, some 5 million more are needed just to make up for all of the jobs that were lost during the Great Recession. At March’s pace, it would take nearly four more years to get there – and that’s not accounting for population growth.

If job growth remains at tepid clip of around 150,000 a month, it would take five years for the jobless rate, which registered 8.2 percent in March, to fall to 6 percent, according to Atlanta Federal Reserve Bank economist Julie Hotchkiss.

Not that the battered U.S. labor market needs anymore bad news, but here it is: A new report that derives employment growth from tax data suggests recent strides have been even meeker than the official Labor Department data suggests.

The January jobs report is due out on Friday, and analysts in a Reuters poll are forecasting the jobless rate remained stuck at 8.5 percent while a median of 150,000 net new positions were created last month, down from 200,000 in December.

Not so fast, say analysts at investment research firm TrimTabs. They cull figures on tax withholding to generate what they say is a more accurate real-time reading of job market conditions. Their findings are grim:

It probably does not offer much comfort to the more than 14 million Americans who are unemployed. But for financial markets still smarting from a Black Thursday felt around the world, the mediocre gain of 117,000 jobs prompted a sigh of relief. Many analysts have begun to worry that the United States might be slipping into recession. So the July figures, accompanied by upward revisions to prior months, came as a welcome respite from bad news.

Still, the increase was meager relative to 7 million job shortfall the country is still facing following a deep recession. Even that figure is an underestimate, since it excludes population growth over the last few years.

Tony Crescenzi, portfolio manager at the Newport, California-based mega bond fund PIMCO, was remarkably downbeat about the numbers: