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Forecasting the Next Nonfarm Payrolls & Unemployment — Poll

April 6, 2020 by

The latest report on US employment (Friday nonfarm payrolls) has turned out to be significantly worse than consensus forecasts suggested. However, the released numbers clearly didn’t cover the worst of the employment crisis, which is currently ravaging the United States. There were two reasons for that. First, the reference week for the March employment situation report was from March 8 through March 14:

In the household survey, individuals are classified as employed, unemployed, or not in the labor force based on their answers to a series of questions about their activities during the survey reference week (March 8th through March 14th)

Second, any work disruptions (including furloughing) that occurred due to COVID-19 should have been counted as unemployment as was directed in the special instructions for surveyors in March. The problem is, a lot of people were still misclassified:

Special instructions sent to household survey interviewers just before data collection started for March called for all employed persons absent from work due to coronavirus-related business closures to be classified as unemployed on temporary layoff. However, it is apparent that not all such workers were so classified. Such a misclassification is an example of nonsampling error and can occur when respondents misunderstand questions or interviewers record answers incorrectly.

The report further mentions the estimate that a correct classification of respondents would result in a significantly higher unemployment rate:

If the workers who were recorded as employed but absent from work due to “other reasons” (over and above the number absent for other reasons in a typical March) had been classified as unemployed on temporary layoff, the overall unemployment rate would have been almost 1 percentage point higher than reported.

Considering the two initial jobless claims reports with over 10 mln total new claims that haven’t been added to the March NFP numbers, these two factors could contribute to the real unemployment rate at the end of March being about 5 or 6 full percentage points higher than we have witnessed in the report (4.4%).

This limited but rapid growth in unemployment is best described with the following charts. Note how the abrupt drop in nonfarm payrolls is much steeper than the one the USA experienced during the recession following the 2007–2008 financial crisis:

Change in US nonfarm employment from the previous month - 2007-2020

For the unemployment claims, I’ve decided to plot the continued claims from the beginning of 2020. Note a relatively small bump for the week ending March 14 and then the suddenness of the jump for the week ending March 21:

Continued unemployment claims - weekly changes for 2020

Before the next employment situation report, we will see four new initial jobless claims reports: April 9, April 16, April 23, and April 30. The reference week for the next NFP release will be April 12–18. Only two of the initial jobless claims reports will be released before and during that week. The initial jobless claims report for that reference week will be the one on April 23. Obviously, after that date, we will know a lot more about the condition of the US jobs market. Still, we could already infer some crude forecast from what we have at this moment.

There are still plenty of counties in the United States where full stay-at-home orders have not been issued. They keep employment figures a bit higher for the time being. Once (or if) they join the quarantine, the deterioration of the US employment will continue to progress. We also know that the May 1 report will include the worst (hopefully) period — the last half of March and the first half of April. It is also possible that the March numbers will get a significant negative revision, so not all of the job cuts from late March will be counted towards NFP report released on May 1. Nevertheless, it would be preposterous to expect positive or even low negative numbers from the next unemployment announcement.

My own take on the situation with the US payrolls remains very gloomy. I believe that we will see both a negative revision for March employment and a devastating figure for April. An unemployment rate of 15% is what I see as a highly probable effect of these two months on US businesses and households.

What unemployment rate do you expect to see in May 1, 2020, report?

  • 10%-14.9% (50%, 1 Votes)
  • 15%-20% (50%, 1 Votes)
  • It will stay at 4.4% or will decrease. (0%, 0 Votes)
  • 4.4%-5.9% (0%, 0 Votes)
  • 6.0%-9.9% (0%, 0 Votes)
  • 20%+ (0%, 0 Votes)

Total Voters: 2

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The poll will expire on May 1 at 00:00 UTC.

Another big question is — will this hurt the US dollar? What is the right way for a Forex trader to profit from this trading opportunity? There are three major scenarios I would point out for the impact of the next NFP news release on the foreign exchange market:

  1. The numbers reported are in line with already pessimistic expectations with unemployment near 10%-12% and job losses from the revised March and the new April data are at about 10–15 mln combined. This wouldn’t warrant further policy actions from the Fed, neither it would prompt the US government for additional stimulus (though it might already be on the table and that would proceed despite any reports). Perhaps a bit counter-intuitively, it would spur demand for the US dollar. Although the global COVID-19 calamity is harming the US economy particularly badly, it will also be one of the faster recovering economies, judging from the pace of recovery from the 2007–2008 financial crisis. Traders, investors, and large corporations would prefer holding the USD under these circumstances. Shorting EUR/USD, GBP/USD, AUD/USD, and NZD/USD or holding a buy on USD/CAD is one of the ways to monetize such forecast. I would avoid USD/JPY and USD/CHF trades if this scenario holds.
  2. In case a particularly bad report gets out on May 1, with unemployment jumping above 15% and total combined March/April payrolls declining by more than 20 mln, there might be a dual reaction on the currency market. This would likely warrant additional stimulus measures both from the Federal Reserve and from the US lawmakers. It would also expose a risk of unexpectedly large structural damage to the US economy. First, we would probably see a rapid but extremely short-lived dollar rally as the investors liquidate risky positions in stocks, commodities, and bonds, including those held in other currencies. Then, we would probably see a much longer lived but also a more gradual correction in USD, with gains in such currencies as JPY and CHF, as the same investors would be fleeing a potential catastrophe in the USA.
  3. In a very unlikely and overly optimistic scenario, the numbers in the report could turn out more or less good. For example, a revision of the March numbers to about 3–5 mln job losses with 1–2 mln more in April with the resulting unemployment figure under 10% would be seen as exceptionally favorable for the entire world’s economy. This outcome would likely lead to a rally in commodity currencies (CAD, AUD, NZD) and less likely but still probably in European ones (EUR, GBP). However, I, personally, wouldn’t plan for this sequence of events at all.

If you have any questions or insights regarding the unemployment numbers to be reported on May 1 or if you have some ideas about trading this news release, please post them here using the commentary form below.

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