Odds Grow for a Blowout Jobs Report

Same Signals From Employment Indicators

Whether there was a large gain in December payrolls isn't as important as recent developments in the labor market indicators, which already are sending a strong-enough signal that a strong payroll report is nigh. The root of their gains is the recent jump in industrial output. Here are a few of these indicators:

Initial jobless claims: The four-week average has fallen to a nearly four-year low of 350,000. The current level is consistent with monthly job gains of more than 150,000 per month.

Continuing claims: This gauge measures the cumulative recipients of weekly jobless benefits, and its ranks have fallen by 400,000 over the past three months, to 3.273 million. The decreasing number of people receiving jobless benefits is likely due to higher labor demand. Because about 60% of the workforce is covered by unemployment insurance, this indicator suggests that payrolls have grown by more than 400,000 over the past three months. With payrolls for October and November up a cumulative 194,000, a large gain in payrolls may yet be captured in the monthly payroll data.

ISM index: It's in territory normally consistent with large gains in employment. Over the past 20 years, on the 20 occasions when the ISM index was above 60.0 (it was 66.2 in December), payrolls gained an average of about 340,000 per month. In December, the ISM's employment component was at its second-highest level in 15 years. A turnaround in manufacturing employment would have important implications for the monthly payroll data, given the beleaguered sector's three-year string of declines totaling an average of roughly 71,000 per month.

Manufacturing overtime: In November, factory overtime reached a three-year high, which is a precursor of future employment gains. Factories are responding to recent increases in order backlogs and slowing supplier delivery times.

Industrial production: Factory output has increased sharply over the past five months, requiring more worker hours.

Employment diffusion index: This indicator, which measures the percentage of industries that added workers during a particular month, rose to a three-year high of 54.7% in November, up from 53.6% in October and 50.0% in September. A year ago, it stood at 37.2%.

Household employment: This increased 2.2 million in the first 11 months of 2003, a sharp divergence from the change seen in payrolls, which fell a net 24,000 during those same months. (The household survey polls about 50,0000 households, while the payroll survey polls about 350,000 establishments.) When new businesses are created, particularly if they're part of a budding industry, the payroll survey is likely to lag in capturing them, and it also fails to capture job growth at small businesses, where most jobs are created. Eventually, the surveys converge, pointing to faster payroll gains.

Working against the possibility of a strong December report is the chance that seasonal hiring might have been lower than normal. If this is the case, it will also mean that seasonal layoffs will be fewer than normal, thereby boosting the January data, which are released in February. This appears to have been the case a year ago, when payrolls fell 211,000 in December but rose 158,000 in January. If we don't see a blowout report tomorrow, the odds will be even higher come February.

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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. He appreciates your feedback and invites you to send it to Tony Crescenzi.

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