With a very strong ADP number this morning, some are wondering if tomorrow's jobs report could be a blockbuster. There's a good chance it could be fairly decent given the recent trend in jobless claims.
Here's the relationship between the two since January 2004:
That there is a relationship between these two is not a surprise as they have a very strong intuitive link. However, the relationship is clearly not consistent as there have been months where jobless claims average 500,000 a week and yet jobs changes were near the flat line. Similarly, we have had months with net job losses where jobless claims have averaged less than 400,000 a week for that month. Coming off of the recession, it seems that we can generate net increases in jobs at relatively high levels of jobless claims. In the past month, jobless claims have averaged 375,600, the lowest May of 2008, which was actually a time when we lost over 200,000 jobs. On the flipside, we had a month in February of 2011 when jobless claims averaged 392,500 and nonfarm payrolls grew 235,000. Go figure.
The basic reason is that the change in nonfarm payrolls is the residual of the massive amounts of gross job gains and losses that occur each month. Millions of jobs are created and eliminated every month. Jobless claims are effectively a measurement of gross job losses. As we enter recession, the offsetting gains diminish and thus we can lose fairly substantial amounts of jobs even at apparently benign levels of jobless claims. The inverse is true as well. The question is always "Which part of that slope are we on?". At this time, we appear to be at a time with accelerating gross job gains that are allowing us to have substantial net job creation even close to the 400,000 level in jobless claims. As such, it is quite likely that we actually will see net private sector job gains of over 220,000 in the report tomorrow. Government losses will offset that amount to some extent, but overall it should be a decent report.