Non Farm Payrolls time again…

It is NFP time again, sweepstakes must be rife on trading floors around the world…..So it is time to use my NFP forecasting model which leverages on both an ARIMA forecast and a simple linear regression using the ADP as the independent variable to generate a mixed forecast of the NFP.

Not surprisingly the ADP and the NFP data releases are positively correlated, thoug this has been significantly time varying. Also the NFP tend to be generally twice as volatile than the ADP numbers, highlighting their challenging nature for a forecaster.

plot of chunk chartsplot of chunk charts

##       ADP                 NFP           
##  "Min.   :-881.19  " "Min.   :-823.00  "
##  "1st Qu.: -31.00  " "1st Qu.: -28.50  "
##  "Median : 143.88  " "Median : 126.00  "
##  "Mean   :  57.85  " "Mean   :  65.45  "
##  "3rd Qu.: 196.34  " "3rd Qu.: 219.50  "
##  "Max.   : 356.56  " "Max.   : 522.00  "

In the below chart I use a 24-month rolling Granger Causality test to investigate the causality at a lag of one between ADP and NFP releases. The chart shows the P-values of the test which indicate in which way the causality,if any, flows. Clearly sometime the ADP has been a leading indicator, other times not.

plot of chunk causality

In the below I use an optimising algorithm to find the best ARIMA over the entire sample so as to generate a trend forecast of the NFP. The wide confidence intervals clearly highlight that those forecasts are associated with a high degree of of uncertainty.

plot of chunk arimachart

Finally I use a mixed model to generate an estimate of what the next NFP release will be. The forecast is derived both from a linear regression model forecast with the ADP as the independent variable and also from the forecast generated by the previously fitted ARIMA model.

The LM model forecasts an NFP release of : 180,034 whilts the ARIMA calls for a release of: 232,259 . This contributes to a mixed model forecast of : 204,243