Non-farm Payroll (NFP) Model Forecast – May 2013

This article presents the Trader Edge aggregate neural network model forecast for the May 2013 non-farm payroll data, which will be released tomorrow morning.

Non-Farm Payroll (NFP) Model Forecast - May 2013

The table in Figure 1 below includes the monthly non-farm payroll data for two months: April and May 2013.  The April data was released last month and the non-farm payroll data for May 2013 will be released tomorrow morning at 8:30 AM EDT.

The model forecasts are in the third data row of the table (in black).  Note that past and current forecasts reflect the latest values of the independent variables, which means that forecasts will change when revisions are made to the historical economic data.

The monthly standard error of the model is approximately 82,900 jobs.  The first and last data rows of the table report the forecast plus 0.5 standard errors (in green) and the forecast minus 0.5 standard errors (in red), respectively.  All values are rounded to the nearest thousand.  Assuming the model errors are normally distributed, roughly 31% of the observations would fall below -0.5 standard errors and another 31% of the observations would exceed +0.5 standard errors.

The actual non-farm payroll release for April 2013 is in the second data row of the table (in purple).  The consensus estimate (reported by Briefing.com) for May 2013 is also in the second data row of the table (in purple).  The reported and consensus NFP values also include the deviation from the forecast NFP (as a multiple of the standard error of the estimate).  Finally, the last column of the table includes the estimated changes from April to May 2013.

Non-Farm Payroll Table May 2013

Model Commentary

The model forecast for May is 161,000, which is down 9,000 jobs from last month's revised forecast of 170,000.  The lower forecast for May reflects a slightly softer employment environment and is consistent with recent weakening in U.S. economic data. The Briefing.com consensus estimate for May is 159,000, which is only 0.02 standard errors below the model forecast.  The actual NFP observation in April was also consistent with the revised model forecast (-0.06 S.E.)  However, the revised actual February NFP value of 332,000 (+2.2 S.E.) was clearly an anomaly and continues to illustrate how unreliable the NFP numbers can be from month to month (see Figure 2 below).

If we ignore the anomalous February data point, both the model forecasts and the actual NFP data indicate that the employment environment has weakened since late 2012.

Figure 2: Non-Farm Payroll Graph May 2013

Summary

Basic forecasting tools can help you identify unusual consensus economic estimates, which often lead to substantial surprises and market movements.  Identifying such environments may help you protect your portfolio from these corrections and help you determine the optimal entry and exit points for your strategies.

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Brian Johnson

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About Brian Johnson

I have been an investment professional for over 30 years. I worked as a fixed income portfolio manager, personally managing over $13 billion in assets for institutional clients. I was also the President of a financial consulting and software development firm, developing artificial intelligence based forecasting and risk management systems for institutional investment managers. I am now a full-time proprietary trader in options, futures, stocks, and ETFs using both algorithmic and discretionary trading strategies. In addition to my professional investment experience, I designed and taught courses in financial derivatives for both MBA and undergraduate business programs on a part-time basis for a number of years.
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