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August 3, 2023

Forecasting NFP: A mixed job market, a slight slowdown

Our guest blogger used Macrobond to construct a model for US jobs ahead of Friday’s figures
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In-house blogger
Guest blogger
Norman Liebke
Associate Economist
Hamburg Commercial Bank
All opinions expressed in this content are those of the contributor(s) and do not reflect the views of Macrobond Financial AB.
All written and electronic communication from Macrobond Financial AB is for information or marketing purposes and does not qualify as substantive research.

After a historic rate-hiking cycle, the US job market remains robust when compared to previous episodes of monetary tightening. But as we assess the available data and model other indicators to forecast the future, a mixed picture for the labour market is revealed.

We are calling for the non-farm payrolls (NFP) report this week to show 190,000 added jobs in July. This trails the 200,000 consensus estimate. 

Our nowcast approach includes univariate and multivariate models, weighting them based on their historical performance. 

On the univariate side, there are approaches such as VECM, VAR and ARIMA. For the multivariate models, we used VARX, a linear model and a neural network model to nowcast NFP.

Our model used variables including the ISM Employment PMI, the consumer survey from the Conference Board, initial jobless claims, the unemployment rate, GDP, labour turnover, and personal consumption expenditures (PCE). We also used our own computed latent factor, which is derived from over 20 early indicators and attempts to represent the state of the US economy.

For some of these variables, like the manufacturing PMI or jobless claims, the values have already been released for July. But other variables released with a longer lag, like GDP, are not that easy to predict accurately. 

For GDP specifically, we used our own nowcast. For other variables with no July value, we nowcast them based on the univariate models mentioned above. 

Ultimately, the 190,000 forecast is the result of the mixed picture shown by the data.

On the one hand, we have had strong initial jobless claims numbers that declined from their June level. We also have (so far) a strong GDP nowcast that expects the US economy to grow by 3 percent in the third quarter. And there was a strong July reading from the Conference Board consumer survey (117 vs. 110.1 in June).

However, there are also factors limiting the extent of optimism. The ISM Employment PMI (Manufacturing) reading for July was disappointing. Industrial production is another factor that slows the nowcast for NFP. And our computed latent factor is signaling that the economy slowed slightly in July before a likely pick-up in August and September. 

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