June Payrolls Preview: Beware A Downside Surprise

The BLS will publish the June jobs report at 830am ET on Friday, just hours after Trump declares trade war on China, and Beijing retaliates, slapping mutual tariffs on $34 Billion of Chinese and US exports.

Analysts expect 195k nonfarm payrolls (Goldman is at 200k) were added to the US economy in June, a decline from the 223k added last month and just below the 6-month average of 202K, with the far more important for the Fed’s tightening regime average hourly earnings print seen rising by 0.3% M/M, and from 2.7% to 2.8% an a Y/Y basis (any unexpected spike higher and watch out below). Meanwhile, Trump’s preferred indicator, the unemployment rate, is expected to remain unchanged at 3.8%.

Heading into the payrolls report, the whisper number is for a below-consensus print as a result of several factors including Thursday’s ADP private payroll data which came in below expectations in June, jobless claims edging up over the month, planned job layoffs rising in the month, and employment sub-components in the ISM and PMI surveys all moderating slightly.

Here’s what to expect tomorrow courtesy of RanSquawk

  • Non-farm Payrolls: (Exp. 195k, Prev. 223k)
  • Unemployment Rate: (Exp. 3.8%, Prev. 3.8%) (the FOMC projects unemployment will hit 3.6% at the end of 2018)
  • Average Earnings Y/Y: (Exp. 2.8%, Prev. 2.7%)
  • Average Earnings M/M: (Exp. 0.3%, Prev. 0.3%)
  • Average Work Week Hours: (Exp. 34.5hrs, Prev. 34.5hrs)
  • Private Payrolls: (Exp. 190k, Prev. 218k)
  • Manufacturing Payrolls: (Exp. 15k, Prev. 18k)
  • Government Payrolls: (Prev. 5k)
  • U6 Unemployment Rate: (Prev. 7.6%)
  • Labour Force Participation: (Prev. 62.7%)


Last month, the US added 223k nonfarm payrolls, above the 3-month moving average (179k – below 200k for the first time since January), the 6-month moving average (202k – fairly stable at this level over the last couple of months) and the 12-month moving average (197k – highest 12-month moving average since March 2017).

ADP PAYROLLS: The ADP reported 177k payrolls were added to the US economy in June, missing expectations of 190k. However, the previous figure was upwardly revised to 189k from an initially reported 178k. While the number was below the trend rate of payroll growth, analysts are unclear whether this was due to weaker demand, or a lack of supply. “At this stage it’s just not possible to know if this is a response to the uncertainty triggered by the trade tariffs and ongoing disputes with trading partners, or simply a reflection of diminishing labour supply,” Pantheon Macroeconomics wrote. The consultancy notes that the ADP’s estimate is based on an array of macro inputs, as well as last month’s official nonfarm payrolls data, whereas the official payroll data measures the actual number of new jobs, and Pantheon says “that is not necessarily the same as the number of people firms wanted to hire.” Nevertheless, Pantheon cuts its forecast for June’s nonfarm payroll figure to 170k from 200k.

LAY-OFFS: Challenger reported that job cuts for US-based employees rose by 18% to 37,202 in June, and up 19.6% versus June 2017. Challenger noted that it was no surprise that employers are hanging on to their current workforces, as four months of this year have seen job cut totals under 40,000. However, it added that in the wake of announced tariffs, we may be entering a period of increased cuts going forward. “The Trump Administration’s tariffs on steel have already begun to cost jobs”, Challenger said and “this figure could increase in the third quarter, as companies that import steel grapple with increased costs.”

UNEMPLOYMENT CLAIMS: Since the previous payrolls report, weekly initial jobless claims data has been trending between 218k and 231k (the latter was the latest print), and the four-week moving average has changed only slightly in that window, falling to 224,500 in the latest week, from 225,500 going into the previous payrolls report. The recent spike higher may be a result of seasonal quirks, some noted, and this may have further to run given that next week’s claims data covers the 4 July holiday, which often distorts seasonal adjustments.

BUSINESS SURVEYS: The employment sub-component in the manufacturing ISM report fell a touch to 56.0 from 56.3, extending a run of positive employment growth in the sector to a 21st straight month. “Employment maintained a modestly strong level of expansion and supported production growth during the month,” ISM said, “respondents noted labor market issues as a constraint to their production and their suppliers’ production capacity.” NOTE: an employment sub-index above 50.8 percent, over time, is generally consistent with an increase in the Bureau of Labour Statistics (BLS) data on manufacturing employment. For non-manufacturing sectors, the ISM’s employment sub-component fell to 53.6 from a prior 54.1, largely due to a reduction in employment in the accommodation and food services sector, the information sector, and educational services (three sectors reported decreases in employment, while 12 industries reported an increase). Respondents, however, said that “employee retention is getting much more competitive,” and “more clients awards, so need to hire more people.”

Finally, a qualitative take on tomorrow’s job report from Goldman:

Arguing for a stronger report:

Service-sector surveys. Service-sector surveys improved meaningfully n on net in June, and our non-manufacturing employment tracker rose 1.8pt to 56.7, close to its cycle-high. Service-sector job growth picked up to +171k in May after +109k in April, and job growth in the sector has averaged 141k over the last six months.

Manufacturing-sector surveys. Manufacturing-sector surveys were generally strong in June across both their headline and employment measures. Our manufacturing employment tracker rose 1.5pt to a cycle-high level of 60.6, and our headline aggregate also reached a new cycle high (of 60.7). This strength echoes commentary in the May Beige Book indicating that production activity “shifted into higher gear.” Manufacturing-sector payrolls rose 18k in May and have increased 26k on average over the last six months.

Labor supply constraints. We view the labor market as somewhat beyond full employment, and as slack diminishes further, this should exert upward pressure on wages and (eventually) downward pressure on job growth. In June however, labor supply constraints have historically been less binding. As shown in Exhibit 1, in years with relatively tight labor markets, payroll growth tends to accelerate in June. One potential driver of this tendency is that firms may aggressively hire students and recent graduates if they had difficulty filling positions earlier in the year.


Arguing for a weaker report:

ADP. The payroll processing firm ADP reported a 177k increase n in June private payroll employment, 13k below consensus. In past research, we’ve found that large surprises in the ADP report tend to be predictive of the subsequent nonfarm payrolls report, but the surprise in the June ADP data was relatively modest.

Job cuts. Announced layoffs reported by Challenger, Gray & Christmas edged up 2k to 40k in June (SA by GS), towards the middle of its 12-month range. On a year-over-year basis, announced job cuts rose 6k.


Neutral factors:

Jobless claims. Initial jobless claims rebounded during the five weeks between the payroll reference periods (averaging 224k vs. 214k in May and 232k in April) but nonetheless remain very low. Continuing claims continued their downtrend,  falling 35k between the survey weeks.

Job availability. The Conference Board labor market differential—the difference between the percent of respondents saying jobs are plentiful and those saying jobs are hard to get—pulled back by 1.4pt to +25.1 in June after reaching a 17-year high in May. The measure nonetheless remains elevated, and we note that job openings rose to a new all-time high of 6,698k at the end of April, according to the JOLTS report.

Weather. May job growth likely received a boost from warmer weather and payback from unusually high snowfall in March and April. Indeed, job growth in weather-sensitive industries (construction, retail, leisure and hospitality) was +77k in May, compared to the 12-month average of +52k. While temperatures were a few degrees above normal in June, we view weather as a neutral factor for month-over-month payroll growth in tomorrow’s report.

Finally, also note that the stock of unemployed job leavers is now high relative to the quit rate (see Exhibit 2), implying a longer-than-usual stint of unemployment for these individuals.

A normalization in the average “time between jobs” would exert further downward pressure on the unemployment rate. To Goldman this suggests that the jobless rate will dip by another 0.1% to 3.7%, a fresh cycle low.

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