Thursday, July 1, 2010
Jobless claims were a disaster, coming in at 472k, on expectations of 455k. Prior was revised, surprise, surprise, higher to 459k from 457k. What is scariest is that between extended benefits and EUC, now that Congress has turned off the perpetual insurance spigot for the unemployed, dropped by -158,155 and -217,513. This is almost half a million people who just lost their weekly governmental stipend to buy Apple’s latest app, iTimberrr. Full report here. RIP Recovery: the economy has now entered the “total freefall” area. And in the meantime, the 2.90% on the 10 year is now implying the FV of the S&P just dropped by another 8 points to about 740. And as a reminder, Goldman’s NFP expectation for tomorrow is -100,000.
Here is Goldman’s Sven Jari Stehn explaining why tomorrow’s NFP number will be a catastrophe:
The key to the June employment report is the “Census displacement” effect—the extent to which the increase in Census workers in May reduced private sector payrolls and the reduction of Census workers in June will add to private sector payrolls. A simple model shows that this effect has been sizable in the past, implying that private hiring may be boosted by around 100,000 in June. Taking into account the unusually high unemployment rate, however, suggests that the effect will be more muted at 50,000. Given the limited number of Census hiring periods, however, these estimates are surrounded by considerable uncertainty.
Although the ADP employment report came in below consensus expectations, our forecast remains that private payrolls grew 150,000 in June. Our forecast for the overall change in nonfarm payrolls is -100,000, with Census payrolls falling 230,000 and other government payrolls down 20,000
Following May’s disappointing private-sector payroll reading and recent signs of weakness in other parts of the economy, this Friday’s employment report will provide an important gauge on the robustness of the recovery underway.
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A key question surrounding Friday’s release is whether there has been a “Census displacement” effect. Citing the disappointing private payroll figure in the peak month of Census hiring in May, a number of analysts have suggested that Census hiring might have displaced private hiring. Given that Census payrolls probably dropped by around 230,000, this effect would suggest a considerable snapback in private hiring in June.
We take the following approach to test the “displacement” hypothesis. We explain changes in private sector payrolls with lagged private sector payroll changes, initial unemployment claims, the change in continuing claims, and Census payroll changes. Our model covers four decennial Censuses—1980, 1990, 2000 and 2010. As data on Census hiring is only available from 1990, we proxy for Census hiring in 1980 using the change in federal government payrolls excluding the postal service. To account for a growing labor force, we scale these variables by the size of the labor force.
Our findings can be summarized as follows:
- Census hiring has indeed displaced private hiring…We find that private sector hiring was reduced by 5,000 for every 10,000 of Census hiring in the past. At face value, this would suggest that private sector hiring in May was held down by around 200,000 and that private hiring in June should be boosted by around 100,000.
- …but the extent depends on the unemployment rate. A key problem with this analysis is that unemployment is much higher today than it was during the last three Census hiring periods. Thus, it is somewhat less likely that Census labor demand has constrained the availability of labor for private-sector employers. To adjust for this, we add the interaction of Census hiring and the “unemployment gap”—the difference between the unemployment rate and the estimated sustainable rate—as an additional explanatory variable to the model. As expected, this interaction term has a significantly positive effect, suggesting that the displacement effect diminishes as unemployment rises. At the current unemployment gap of 4.7% the model suggests that 10,000 of Census hiring would reduce private hiring by only about half the “normal” effect. This model therefore suggests that Census hiring in May subtracted around 100,000 from private hiring and that we could expect the reduction of Census workers in June to add 50,000 workers to private payrolls.
Although the data flow since publication of our preliminary estimate has been on the weaker side, we have not changed our payrolls forecast. The ADP report on private-sector payrolls rose by just 13k in June, coming in below the 60k consensus expectation. However, while the ADP report provided an accurate early indication of the weak private payroll release in May, it has generally tended to underestimate private hiring—especially in March and April of this year. Furthermore, the ADP report combines payroll data from ADP with other data—such as initial claims and lagged payrolls—to forecast the change in private-sector payrolls. As a result, a significant part of the low ADP reading is likely to be due to weak private payrolls in May and stubbornly high claims, rather than independent information suggesting weakness of private hiring in June. We therefore continue to project that total nonfarm payrolls fell 100,000 in June, with a 150,000 gain in the private sector, a 230,000 drop in Census payrolls, and a 20,000 drop in other government payrolls.
Sven Jari Stehn
This article was posted: Thursday, July 1, 2010 at 7:46 am