Fed Watch: Next Up: Employment Report

Tim Duy:

Next Up: Employment Report, by Tim Duy: Another quick post between appointments. Tomorrow is the all-important employment report release day for December. I say "all-important" partly in jest. I would caution against placing too much weight on a preliminary number that is well-known to be heavily revised. But the Federal Reserve seems to place an unusually high weight on the most recent month of data, so we must too.

Since it worked well last time, my quick-and-dirty estimate is a 245k gain for nonfarm payrolls in December:

Use with caution, usual caveats apply. Forecasting the preliminary nonfarm payroll gain is akin to throwing darts. And my prior is that something that worked well last month probably will not work well this month. That said, while this technique might not predict the exact number, I think it tells us that:

1. The labor market is improving modestly.
2. Any large deviation from a gain of 245k - either positive or negative - is likely not indicative of the underlying trend in labor markets.

For comparison, this is a decidedly above consensus forecast. Consensus is for 200k with a range of 120k to 225k. 245k would be a large upward surprise.

Finally, when considering the policy implications of the report (unless I happen to be up at 5:30am tomorrow, I won't get a chance to review the report until well after the market closes), consider the tension between incoming chair Janet Yellen's preferred preferred measures of labor market slack/tightness:

The improvement on the left exceeds that on the right. That argues for policy inertia unless policymakers shift their focus toward on side or the other. The obvious concern is that improvement on the left becomes too much for policymakers to easily ignore.