Every watcher of the labor market now knows that seasonally adjusted jobs number – 175K. The +175K is about 5K above what the market expected.
The +175K makes the third month of an increasing trend in the seasonally adjusted job number, which is causing many analysts to raise their March jobs target higher.
With this as the background, how likely is next month’s job figure to come in below target?
Because the answer lies partly in how actual estimated counts get seasonally adjusted, here’s some background on the non-seasonally adjusted numbers.
The seasonally adjusted number of +175K is based upon the actual estimate of 136.183 million – the non-seasonally adjusted number – which came in up 750K over the prior month.
Seasonally adjusted and non-seasonally adjusted jobs numbers
The following figure has the seasonally adjusted and non-seasonally adjusted jobs numbers stacked on top of each other.
The top chart is the month over month change in the seasonally adjusted figure. The bar chart shows that since January the economy has been improving.
The bottom figure is the non-seasonally adjusted estimate, which, for 2014, came in at -2.836 million in January and +750K in February.
The seasonality in the non-seasonally adjusted numbers looks pretty clear. The actual jobs estimate always declines in January and July. In contrast, the actual jobs estimate almost always increases in February and August.
The seasonal adjustment factors matter because March’s employment report – which might be one of the more important jobs reports this year – will be affected by seasonal adjustment, and is likely to come in short of bumped-up analysts’ expectations. Here’s why.
Jobs gain over the months
The following is the relationship between the month-over-month job gains for January. As was mentioned, January employment is always negative relative to December (i.e. employers beef up their Christmas staff). This Christmas to January effect is shown by the negative growth on the vertical axis.
The horizontal axis has the change in employment from January to February.
Interestingly, there’s a negative relationship between the two. When January’s jobs number is large, such as 2014’s -2.836 million, February’s growth tend to be bigger, as was 2014’s February growth of +750K.
(As a note, the linear regression would have predicted a non-seasonally adjusted February jobs figure of over 1 million, or over 500K on a seasonally adjusted basis.)
January’s job growth number with March
The next chart replaces January’s job growth number with March.
Interestingly, counter to the negative relationship between December and January, the relationship between February and March is positive. Essentially, a high February number – as we saw – equates to a high March growth number.
In doing the simple statistics, the +750K would mean a +785K in March, or a seasonally adjusted figure of pretty close to +200K.
Looks like +200K is where analysts should be taking their March number. Why are analysts likely to be wrong?
Year over year jobs growth rate
The most obvious response is that a +200K jobs number would equate to a Y/Y employment growth rate of 1.64%. A growth rate of 1.64% would be above where the Y/Y growth rate stands now, as well as opposite in trend. The following chart shows this graphically, where the pink line represents the trend and the gray horizontal line represents the Y/Y target growth if +200K is to be achieved.
Essentially, if there’s a reacceleration in the economy, then analysts might be right on a +200K employment number. The best bet is that the majority of labor market analysts will be wrong, with a more reasonable estimate at +130K.