There are no guarantees when predicting Federal Reserve monetary policy decisions. But yesterday’s surprisingly strong increase in US private payrolls in February by ADP’s reckoning gives the hawks a potent new data point to make the case for squeezing monetary policy at next week’s FOMC meeting.
A quick review of Wednesday’s news: the crowd was looking for a gain of 183,000, based on Econoday.com’s consensus forecast. The actual increase was sharply higher at a sizzling 298,000. One month is hardly definitive proof of anything in economics, but as I noted yesterday the year-over-year change for payrolls has been ticking higher lately and February’s ADP data feeds into that trend.
The bigger issue is deciding if the latest ADP figures will translate into a similarly bullish picture in tomorrow’s official payrolls report for February? Econoday.com’s consensus forecast sees the Labor Dept.’s estimate of private employment rising 190,000 – a respectable gain, but moderately below January’s 237,000 advance. But in the wake of the red-hot increase via the ADP report, there’s a case for revising tomorrow’s forecast up, perhaps by a lot.
Regressing the monthly changes on the ADP and Labor Dept. data sets tells the story. Based on the relationship since 2001 (the start for the ADP figures), yesterday’s release implies that the government tomorrow will report a gain of 297,000 for private US payrolls in February – more than 100,000 above the consensus forecast.
Regression analysis isn’t fate, of course, in part because any one point forecast has a relatively wide confidence interval. At a 95% confidence level, the forecast variation that applies to the 297,000 point estimate for tomorrow’s report ranges from roughly 280,000 up to 313,000. At a 99% confidence level, the range expands to a 275,000-to-318,000 band. But that’s still encouraging and so the regression analysis implies that the worst-case scenario tomorrow will still deliver a solid improvement over January’s employment gain.
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