On the heels of a disappointing ADP print which Mark Zandi warned signaled “the peak of the jobs cycle,” the November payrolls data remains likely to show hiring momentum remained solid if ‘soft’ survey data is anything to go by combined with the seasonal benefits of strong retail hiring ahead of the holiday season. However, as Goldman Sachs notes, a drag from winter storms, and given rising jobless claims and tighter financial conditions, the underlying pace of job growth may have also slowed somewhat.
Notably, consensus has tended to underestimate November payrolls by an average of roughly 30k over the last five years. Meanwhile, October payrolls could be revised higher as was the case in the previous two years, when hurricane disruptions may have delayed some data reporting. October payrolls were then revised up by an average 18k in the following month.
Bloomberg also points out that the seasonal adjustment factor applied to November payrolls reflects a recurring pickup in the pace of job creation, partly due to holiday-related hiring. The adjustment typically trails October, when the bulk of that rise occurs, and has averaged 249k over the past five years.
CONSENSUS FORECASTS:
- Non-farm Payrolls: Exp. 200k, Prev. 250k
- Unemployment Rate: Exp. 3.7%, Prev. 3.7% (NOTE: the FOMC projects unemployment will stand at 3.7% at the end of 2018, and 4.5% in the longer-run)
- Average Earnings Y/Y: Exp. 3.1%, Prev. 3.1%
- Average Earnings M/M: Exp. 0.3%, Prev. 0.2%
- Average Work Week Hours: Exp. 34.5hrs, Prev. 34.5hrs
- Private Payrolls: Exp. 200k, Prev. 246k
- Manufacturing Payrolls: Exp. 20k, Prev. 32k
- Government Payrolls: Prev.4.0k
- U6 Unemployment Rate: Prev. 7.4%
- Labour Force Participation: Prev. 62.9%
PRIMARY DEALER FORECASTS:
Average: 197k (Median: 200k, High: 230k, Low: 140k)
- Barclays: 200k
- BMO: 190k
- BNP Paribas: 225k
- BAML: 200k
- Citi: 205k
- Credit Suisse: 205k
- Daiwa: 180k
- Deutsche Bank: 200k
- Goldman Sachs: 185k
- HSBC: 185k
- Jefferies: 220k
- JPMorgan: 175k
- Mizuho: 175k
- Morgan Stanley: 198k
- NatWest Markets: 205k
- Nomura: 175k
- RBC: 220k
- Scotiabank: 200k
- Societe Generale: 230k
- TD: 215k
- UBS: 140k
- Wells Fargo: 215k
The Headlines – via Ransquawk
Year-to-date, payroll growth has averaged 218k, 216k over the last three-months, and 213k over the last six months. All of these outcomes are well above the pace necessary to keep the unemployment rate unchanged, indicating demand for labour remains strong,” Westpac says, adding that “this strength in employment will see downward pressure remain on the unemployment rate, though the next step lower is more likely in a few months’ time than November.”
Goldman is more downbeat than most estimating nonfarm payrolls increased 185k in November (mom sa), compared to +198k consensus, +250k in October and the three-month average of +218k, with unseasonably high snowfall in the Northeast and Midwest expected to weigh on payrolls in tomorrow’s report.
Arguing for a weaker report:
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Jobless claims. Initial jobless claims have rebounded, averaging 218k over the five weeks between the payroll reference periods and up from the cycle lows during the September payroll month (average of 206k). While initial claims in the November payroll month only returned to their July averages, the uptrend has continued (the current 4-week moving average is 228k), and we believe these increases reflect a legitimate sequential rise in layoff activity. Continuing claims have also increased, rising 67k between the October and November survey weeks. While they declined in the most recent report, this occurred after the November payroll month had ended, and we also cannot rule out seasonal adjustment distortions related to the Thanksgiving holiday. Taken together, the claims reports in recent weeks raise the possibility that job growth could be slowing somewhat, perhaps influenced by the tightening in financial conditions.
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Winter weather. We believe snowstorms during the survey period in the eastern half of the United States weighed on November payroll growth. Our population-weighted snowfall dataset was 1½ inches above normal during the survey week (see Exhibit 1), and we are assuming a drag from winter weather of between 15k and 25k in tomorrow’s report. The wildfires in California could also weigh on November job growth (perhaps by an additional 3-6k).
Exhibit 1: Winter Storms during the Survey Week Likely Weighed on November Payroll Growth
Source: National Centers for Environmental Information, National Oceanic and Atmospheric Administration, Department of Labor, Goldman Sachs Global Investment Research
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Company-level one-offs. We expect a few company-level developments to weigh on payroll growth in tomorrow’s report, with a combined drag of 10k or more. Within the retail industry, we expect a continued drag from store closings (Sears closing 46 stores by November, Steinhoff Mattresses closing 200 stores starting in October, Lowe’s closing 20 stores). Layoff programs at Verizon (44k employees eligible) and General Motors (14k workers affected over the next year) could also weigh on job growth in tomorrow’s report and in coming months.
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ADP. The payroll-processing firm ADP reported a 179k increase in October private payroll employment—16k below consensus and the slowest pace in three months. While higher jobless claims may have weighed on the ADP model this month, we also expect a larger drag from winter storms in the BLS measure, which is generally more sensitive to weather.
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Service-sector surveys. Service-sector business surveys were mixed in November, as our headline non-manufacturing tracker increased by 0.5pt, but the employment component declined (-1.6pt to 54.8). Similarly, while the headline aggregate of the ISM non-manufacturing survey increased, the employment component pulled back. Despite the sequential weakness, we note that most employment surveys remain at firm levels (see Exhibit 2). Service-sector job growth rose 179k in October and averaged 155k over the last six months.
Exhibit 2: Employment Surveys Have Retrenched but From Elevated Levels
Arguing for a stronger report:
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Holiday retail hiring. Thanksgiving was particularly early this year (November 22), and this could increase the number of holiday retail employees reflected in the November establishment survey. Retail job growth tends to be strong in similar calendar configurations, accelerating in each of the last four instances (2006, 2007, 2012, and 2017). Last November, for example, retail employment rose 27k, its fastest pace of the year. This, coupled with strong consumer fundamentals ahead of the holiday shopping season, should support retail job growth despite a continued drag from store closings (discussed above).
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Post-hurricane rebound. Job growth tends to rebound above-trend after a major disaster. And while employment already rebounded in the Carolinas following Hurricane Florence (+47k in October after -28k in September), we believe Hurricane Michael may have reduced October job growth in Georgia (+2k after +19k) and the Florida panhandle. On net, we note the possibility of a modest further boost from these effects in tomorrow’s report.
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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—rose 2.4pt to +34.4 in November, a new cycle high. JOLTS job openings modestly declined from a cycle high in the most recent report (7,009k in September).
Neutral factors:
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Manufacturing surveys. Manufacturing-sector surveys were mixed in November but generally remain at elevated levels. Our manufacturing employment tracker edged up after falling for four straight months (+0.2pt to 57.5). Both the headline aggregate and employment subcomponent of the ISM manufacturing survey increased against expectations for a modest decline in November. Manufacturing payroll employment rose 32k in October and has increased by 21k on average over the last six months.
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Job cuts. Announced layoffs reported by Challenger, Gray & Christmas decreased by 13k in November to 53k (SA by GS). On a year-over-year basis, announced job cuts rose 18k, mostly reflecting announced layoffs in the automotive sector (+13k yoy) that will take place gradually.
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Tariff uncertainty. Trade tensions have escalated in recent months, with the White House imposing a 10% tariff on $200bn worth of Chinese imports on September 24th(and the “pause” announced at the G20 occurring after the November survey week). We continue to expect that the growth and employment effects of trade frictions will be modest in the US, and accordingly, we are not embedding an explicit drag in our November payroll estimates. That being said, we note the risk that increased uncertainty or the prospect of retaliatory tariffs may have weighed on hiring.
Goldman sees the November unemployment rate remaining stable at 3.7% after rising 0.05pp to 3.74% in the October report. Despite signs of slowing, we believe the pace of job growth remains above the demographic trend, and the participation rate (62.9% in October) now appears somewhat elevated and may retrench (this would lower the unemployment rate, other things equal). At the same time, we believe the risks are skewed towards a higher jobless rate in tomorrow’s report, given the 67k increase in continuing claims from survey week to survey week (see left panel of Exhibit 3). Additionally, the early Thanksgiving this year suggests the household survey may miss some holiday seasonal hiring. For example, last November (also an early Thanksgiving), the unrounded jobless rate rebounded (to 4.12% from 4.07%), reflecting a sharp rise in youth unemployment (+2.2pp to 15.9% for ages 16-19) that was particularly pronounced among part-time workers. These distortions subsequently unwound in December, echoing a similar pattern in previous instances (see right panel of Exhibit 3).
Finally, Goldman estimates average hourly earnings increased 0.3% month over month, with the year-over-year rate moving to a cycle high of 3.2%. This reflects somewhat favorable calendar effects, as the survey week ended on the 17th. Additionally, we see scope for a rebound in supervisory earnings, as October average hourly earnings (+0.18%) underperformed relative to the production and nonsupervisory subset (+0.31%). Finally, we expect a modest boost from hourly wage hikes at Amazon, perhaps worth 0.01-0.04pp in November.
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Bloomberg’s Christopher Condon details what some economists expect from the report:
Wells Fargo
“Admittedly showing some signs of modest slowing in one of the important secondary employment indicators, the underlying pace of job growth remains strong as evidenced by historically low initial jobless claims, healthy private-sector employment sentiment, and consumers’ assessment of the labor market continuing to make fresh cycle highs,” wrote economist Sam Bullard, who projects 200,000 new jobs. He noted a variety of wage measures inching up in recent months. “Against a tight labor market, combined with Amazon increasing its minimum wage last month, we look for average hourly earnings to rise 0.3 percent in November. If realized, that would take the annual rate to 3.2 percent — the fastest annual pace in nearly a decade.”
Grant Thornton
Chief Economist Diane Swonk projects 185,000 new jobs. “We expect to see solid job creation but it will appear weaker month-on-month compared to the distortions in October’s data,” she said. “Our forecast shows average hourly earnings up 0.2 percent for November, which would translate to a 3.1 percent gain on a year-over-year basis.”
TD Securities
“The jobs report is shaping up to be hawkish across the board,” wrote strategist Michael Hanson, who forecast 215,000 jobs. He said employment growth will likely revert to trend and “remain strong in line with the resilience seen in job surveys, from regional Fed surveys to ISM indicators which on balance remain consistent with payrolls running at a +200k pace.” On wages, Hanson expects a 0.3 percent gain from the prior month, helped by recent pay increases at Amazon.com Inc., and 3.2 percent year-on-year growth.
Societe Generale
“One source of strength in November could be the retail sector,” wrote Omair Sharif, senior U.S. economist, who predicted 230,000 new jobs. He cited a jump in the industry’s job openings from a year earlier and said if that and “additional wage and other perks are any indication, retailers likely boosted hiring heading into November.” Sharif sees average hourly earnings rising 0.3 percent from the prior month and 3.2 percent on an annual basis.
Bloomberg Economics
“Strong growth earlier this year should ensure the economy creates jobs at a robust pace into year-end,” economists Yelena Shulyatyeva, Tim Mahedy and Carl Riccadonna wrote in a note. “The composition of job gains will provide clues on which sectors will drive hiring in 2019. As the Fed continues to tighten policy, the housing and auto sectors will likely get hit by rising interest rates.” Bloomberg Economics projects a payroll gain of 240,000 and a 0.2 percent rise in average hourly earnings from the prior month.
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