Non-Farm Payroll (NFP) Forecast – July 2013

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

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

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

The model forecasts are in the third data row of the table (in blue).  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 79,400 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.  If the model errors were 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 June 2013 is in the second data row of the table (in purple).  The consensus estimate (reported by Briefing.com) for July 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 June to July 2013.

Figure 1: Non-Farm Payroll (NFP) Table July 2013

Figure 1: Non-Farm Payroll (NFP) Table July 2013

Model Commentary

The aggregate model forecast for July is 204,000, which is down 18,000 jobs from last month's revised forecast of 222,000.  The Briefing.com consensus estimate for July is 175,000, which is 20,000 lower than the June NFP release.  As a result, the July consensus estimate is only modestly below the Model forecast for July (-0.37 S.E.).  If the model forecast were accurate, there would be a small upside surprise tomorrow.

The February 2013 NFP data (the large, one-month spike above 300,000 in Figure 2 below) was clearly an anomaly. The NFP data had been trending lower since late last year, but the recent increase suggests the employment environment has stabilized.

Figure 2: Non-Farm Payroll Graph July 2013

Figure 2: Non-Farm Payroll Graph July 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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