An important component of Friday’s April jobs report is the seasonally adjusted change in non-farm payroll employment. Last month’s report indicated an employment increase of 120,000 while this month’s ADP survey showed employment grew by 119,000. Another gain of 120,000 jobs or less in April will be evidence that the labor market recovery has slowed. An increase of 200,000 jobs is required to maintain the growth seen during the mild winter.
April is typically a much better month for payrolls than March because of seasonal effects. Employment will be higher in April than March as it has been in every year since 1949. Even in 2009, in the depths of the deepest recession since World War II, payroll employment grew by 182,000 between March and April. The key question for Friday’s report is whether the raw increase in employment numbers will be large enough relative to the BLS seasonal adjustment factor.
Last year employment grew by 1.18 million between March and April, but that translated to a gain of only 251,000 after the BLS seasonal adjustment. Seasonal adjustment factors evolve over time to reflect changing economic conditions. The March to April adjustment has been growing; it has been larger in the past three years than it was throughout the previous decade. Last year’s report would have indicated an employment gain of 400,000 in April if the seasonal adjustment factor from a decade ago had been used.
Since October 2011 employment has been 1.43% higher, on average, than twelve months earlier. If that trend holds in April and the seasonal adjustment factor continues to grow, seasonally adjusted employment will increase by 200,000. It is important to note that the margin of error for the BLS estimate of a one month employment change is 100,000. Nonetheless, if the April increase is only 120,000, as it was in March, the employment change over the past two months will be significantly lower than in the previous six months.
One month’s BLS employment report is noisy, subject to substantial seasonal adjustment, and should be interpreted with caution. In the six months between August 2011 and February 2012 payroll employment grew by more than 200,000 per month, on average. The weak ADP report this morning, combined with increasing new unemployment insurance claims, suggests that we will see employment growth closer to 100,000 than 200,000 on Friday. A second consecutive month with growth of 120,000 jobs or less would be enough evidence to conclude that the recovery has slowed.