Modest Improvement in Jobless Claims and ADP Figures Turn Focus on Tomorrow’s Jobs Report

By Rom Badilla, CFA

September 6, 2012

Fewer people filed for unemployment insurance last week suggesting mild improvement in the jobs market. Initial Jobless Claims fell for the week ending September 1, 2012 to 365,000 individuals from an upwardly revised prior week number of 377,000 people according to the U.S. Department of Labor. Market participants were surprised by the lower numbers since the median forecast by economists was at 370,000 out-of-work individuals. With the recent data point, the four-week moving average remained unchanged from the prior week and sits at 371,000 people.

Initial Jobless Claims 4-Week Moving Average

An average is used to smooth out the week to week volatility and is a gauge of the overall health of the jobs market and the economy. A four-week moving average of greater than 400,000 is typically associated with job destruction and a rising Unemployment Rate and rising Non-Farm Payrolls. With slack in the jobs market and the potential for slower economic growth, stocks should fall while bond prices should rally (bond yields decline). Conversely, a moving average in the 300,000 to 350,000 range coincides with robust job growth and economic expansion. This should equate to higher stocks, declining bond prices (bond yields increase).

In a separate report, the workforce increased among businesses in August which may bode well for the Friday morning’s job report. The Automatic Data Processing National Employment Report showed that businesses added 201,000 new workers to their payroll last month which is an increase from an upwardly revised 173,000 people in July. This was a stronger than expected report since market expectations were calling for a decline to 140,000.

ADP Employment Change

Chief Economist, Joseph LaVorgna from Deutsche Bank wrote in their latest U.S. Data Flash that the recent data “imparts some upside risk” to the release of Non-Farm Payrolls. Tomorrow’s number, which represents the change reported on a national level to the labor force, may pleasantly surprise markets by coming in above expectations.

Having said this, the market shouldn’t get ahead of itself for tomorrow’s number. LaVorgna cautioned that while the ADP improvement is noteworthy, the degree of the surprise relative to expectations is still within reason given the historical data. Hence, the positive surprise in ADP may not translate into a similar outcome for Non-Farm Payrolls.

In addition, the Deutsche Bank economist mentioned that “payrolls have been following a similar pattern the last three years when early year strength has given way to weakness and then a modest recovery in hiring. Last year, August payrolls were initially reported at zero and subsequently revised up to +85k. We would not be surprised if the same thing happened again this year.”

All eyes, including the Federal Reserve’s, will be watching the Jobs report released tomorrow. Currently, the median economists’ forecast shows only an increase in the workforce of 130,000 people in August. Comparatively, Non-Farm Payrolls increased by 163,000 workers in July. The Unemployment Rate is expected to remain the same at 8.3% based off of consensus surveys. Any signs of significant deterioration in the employment picture may prompt the Federal Reserve to add monetary stimulus to the economy which in turn should keep bond yields low.

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