THE U.S.

ECONOMIC MONITOR

APRIL 2, 2014 IAN SHEPHERDSON, CHIEF ECONOMIST

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THE U.S. ECONOMIC MONITOR

APRIL 2, 2014 IAN SHEPHERDSON, CHIEF ECONOMIST

The ADP payroll measure lags the ocial payroll numbers; it is not a reliable advance indicator. Housing construction is agging in the face of the levelling-o in new home sales. Auto sales surged back onto their rising trend in March; expect less dramatic leaps in Q2.

close correlation between the initial ADP number and the prior official data, these lagged components from the BLS report have a substantial weight in the model. The point of incorporating lagged official data is that the payroll numbers are very auto-regressive; in other words, they have a strong tendency to revert to trend. So, at times when the data are not affected by severe weather events or seasonal adjustment oddities, the best forecast for payrolls in any given month usually is the number for the previous month. ADP is supposed to provide a cross-check against this idea each month, but because it puts so much weight on the lagged data, it does not do the job. ADP will not reveal its raw data, presumably because they do not correlate well with the official numbers. This glaring flaw in the construction of the ADP report means we can no longer take the number seriously as an advance guide to the official data. But the report is not completely useless, though, and we regard the relative strength of ADP payrolls in December and January as evidence of the impact of the weather. ADPs survey counts people as employed merely if their name appears on the payroll list, whereas the BLS requires people to do at least some work for which they were paid. This means that part-timers kept away form work because a snowstorm hit on their one or two workdays in the payroll survey week are counted in the ADP report but not in the payroll numbers. On the assumption that
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ADP Starts the Payroll Circus, but You Probably Should Ignore It
Its a shame that April Fools Day fell yesterday and not today, because we have come to regard the ADP employment report as a bit of a joke. Since the report was reconfigured and allegedly improved in October 2012, the initial ADP estimate of the monthly change in private payrolls has tended to lag the initial estimate of the official number by a month, as our first chart shows. This bizarre situation arises because the number reported by ADP is not derived solely from employment records culled from ADPs customers. Instead, ADP reports the output of a statistical model which incorporates lagged official payroll data. And judging from the
ADP LAGS THE OFFICIAL PAYROLL NUMBERS

Private payrolls as initially reported, thousands ADP as initially reported, advanced by one month

most people in this position are not then fired for not turning up to work in a blizzard, the ADP methodology better captures the underlying economic story. Todays ADP number ought to be stronger than the initial 139K February estimate, which was heavily influenced by the weak official data for January. We look for a reading of about 180K, trivially below the 190K consensus. The number would have to be a very

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THE U.S. ECONOMIC MONITOR

long way from these levels to trigger any change in our 250K forecast for Fridays official number.
AUTO SALES REBOUND TO TREND

APRIL 2, 2014 WWW.PANTHEONMACRO.COM

Light vehicle sales, millions 18 17 16 15 14 13 12 11 10 9 8

Housing construction starting to correct?

Of yesterdays three monthly economic reports we were most interested in the data which attracted the most attention in the markets, namely, the construction and auto sales numbers. The headline construction numbers were deeply unexciting, but the breakdown revealed an abrupt dip in new home activity, the first absolute decline since September 2011. These data are volatile and subject to large revisions, and the weather might have played a role in suppressing activity too. But we cant escape the fact that new home sales have levelled off, and new construction activity needs to adjust to reflect the reduced pace of sales. The alternative is that new home inventory rises relative to sales, but homebuilders have been keen in recent years not to let that happen, presumably in order to support prices.
HOUSING CONSTRUCTION IS STALLING

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to the first quarter average. Auto sales will not keep rising at anything like the March pace, but the data were a relief because they confirmed that the severe weather was the key problem over the winter, rather than a real slowing. As for the ISM, we noted in the Monitor yesterday that the index has hugely overstated economic growth in recent years because it has very little to say about the state of the small business sector, which is a far more important engine of growth in output and jobs than large manufacturers. As long as the ISM does not roll over, we are not much bothered about modest shifts in the numbers in either direction. The 0.7-point
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New home sales, thousands (Left) Real new housing construction, $B 2005 prices (Right) 500 450 400 350 300 250 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14

increase in March was trivial. We would not be surprised by a modest decline over the next couple of months, following the downshift in Chinas PMI, but we are not expecting any serious change in the trend.
ISM UNLIKELY TO MOVE SUBSTANTIALLY DURING SPRING

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China manufacturing PMI, advanced one month (Left) U.S. ISM manufacturing index (Right) 56 54 52 50 48 Jan 10 Overshoot reecting seasonal adjustment problems and unsustainable inventory-building 62 60 58 56 54 52 50 Jan 11 Jan 12 Jan 13 Jan 14 48

On a more positive note, March auto sales were significantly stronger than expected, with the annualized rate rebounding to 16.4M from 15.3M, returning to the pace implied by the upward trend in place since 2010. As a result, sales for the first quarter as a whole were little changed; we had expected a decline. As a result, we have nudged up our forecast to a gain of 1.7% from our previous 1.4% estimate. Thats hardly transformational but it does raise the starting point for second quarter consumption relative

Ian Shepherdson ian@pantheonmacro.com

+1 914 610 3830

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THE U.S. ECONOMIC MONITOR

THIS WEEK IN BRIEF

APRIL 2, 2014 WWW.PANTHEONMACRO.COM

Note: D prefix denotes Datanotes for these releases. Monday, March 31 D: Chicago PMI (3)/9:45 EDT The index dipped, disappointingly, to 55.9 from 59.8. Tuesday, April 1 Redbook Chain Store Sales (3/29)/8.55 EDT Sales growth dropped to 2.3% year-over-year from 3.1%, thanks to unfavorable Easter week comparables. D: ISM Manufacturing Survey (3)/10:00 EDT The headline index nudged up marginally to 53.7 from 53.2, boosted by a rebound in the production component, partly offset by shorter delivery times. Employment dipped too. D: Construction (2)/10:00 EDT Spending rose 0.1%, with a gain in private non-residential spending offsetting the first dip in new home construction since September 2011. Auto Sales (3)/Late Afternoon EDT Sales jumped to 16.4M from 15.3M in February, better than expected and returning to trend after several weak months. Wednesday, April 2 Mortgage Applications (3/28)/7:00 EDT The purchase index rose 2.8% to 174.0 last week as the slow reversal of Februarys seasonally-afflicted drop continues. D: ADP Employment Report (3)/8.15 EDT The official private payroll number for the previous month is a key element of the ADP model, along with the survey of employers. This suggests we should look for an uptick to about 180K, after 139K in February. Consensus: 190K. Factory Orders (2)/10:00 EDT The 0.8% rise in durable goods orders suggests total orders climbed by about 0.5%. Consensus: 1.2%. Thursday, April 3 D: Initial Jobless Claims (3/29)/8:30 EDT We expect a partial reversal of the recent run of favorable seasonals, so claims should rise to 325K from 311K. Consensus: 319K. D: International Trade (2)/8:30 EDT A modest further recovery in core exports, following their weather-induced December plunge, ought to help push the deficit down to $38B from $39.1B. Consensus: $38.5B. D: ISM Non-manufacturing (3)/10:00 EDT The headline index tends to follow the trend in core retail sales, which have slowed, so we expect a drop to about 50 from 51.6. Consensus: 53.5. Friday, April 4 D: Employment (3)/8:30 EDT We look for payrolls to rise by about 250K, assuming about a third of the weather-related hit in unadjusted payrolls since December is reversed, and that the seasonal factor is the same as in March last year. The unemployment rate should dip a tenth to 6.6%, and hourly wages should be unchanged, reversing part of Marchs weather-related jump. Consensus: Payrolls 200K, unemployment 6.6%, hourly wages 0.2%.

THIS WEEKS FUNDING

Monday 31 Tuesday 1 Wednesday 2 Thursday 3 Friday 4

Auction: $25B 3-month, $23B 6-month bills Auction: 4-week bills Auction: $25B 1-year bills Nothing Announcement: 3-month, 6-month bills (Apr. 7) Announcement: 2-year notes (Apr. 8) Announcement: 10-year notes (Apr. 9) Announcement: 30-year bonds (Apr. 10) Nothing

PANTHEONS FINANCIAL FORECASTS

2-yr 10-yr 30-yr Curve 10-2 Curve 30-2 Dow Jones IA Yen/Dollar Dollar/Euro Dollar/Sterling 4:00pm Tue. 0.07 0.43 2.76 3.61 233 318 16,533 103.7 1.38 1.66 Fed funds actual

End-month: Jun 0.20 0.50 3.10 4.10 260 350 16,600 105 1.37 1.65 Sep 0.20 0.60 3.30 4.40 270 380 16,900 107 1.35 1.64 Dec 0.20 0.70 3.50 4.70 280 400 17,250 108 1.35 1.63 Mar 0.20 0.80 3.75 5.00 295 420 17,250 110 1.33 1.62

PANTHEONS ECONOMIC FORECASTS

GDP CPI

Q2 third Q3 third Q4 third Q1 forecast Q2 forecast Q3 forecast

2.5% 4.1% 2.6% 2% 3%

2011 year: 2012 year: 2013 year: 2014 year:

1.8% 2.8% 1.9% 2%

2%

Feb: 0.1% (1.1% y/y); core 0.1% (1.6% y/y) June 2014 forecast: 1.6% y/y; core 1.8% y/y September 2014 forecast: 1.8% y/y; core 1.9% y/y

Unemployment: June 2014, 6.4%; December 2014, 5.9% Federal budget: FY 14 forecast: -$500B (2.9% of GDP)

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