Here is the consensus for the key numbers the BLS will report at 8:30am ET on Friday morning
- March Nonfarm Payrolls Exp. 180K, the lowest print of 2017 (Prey. 235K, Jan. 227K) US Unemployment Rate (Mar) M/M Exp. 4.7% (Prey. 4.7%, Jan. 4.7%)
- Average Hourly Earnings Exp. 0.20% (Prey. 0.20%, Jan. 0.30%)
Big Picture: Friday’s non-farm payrolls comes ahead of the May 2-3rd Fed meeting, where according to Fed Fund markets there is only a 5% chance of a 25bps hike The Fed’s favoured inflation metric (PCE) edged above the mandated 2% Y/Y in February and inflation remains under the spotlight where the rate hike path is concerned. As such, once the fast money moves subside, as has been the case in the past several months, the focus may well fall on the average hourly earnings to see If the uptick in inflation is holding up. This is particularly the given the February report showed real personal spending pulling back slightly by 0.1%, when a 0.1% increase was forecasted. Last report showed AHE dipping to 0.2% from 0.3% in January’s print and a return to Jan’s levels could indicate that a slightly more optimistic outlook on inflation is justified. Its worth noting that this report comes amid a backdrop of bad weather and temporary headwinds are factored in.
Goldman’s payolls forecast is even more dour, as economist Spencer Hill says the bank estimates nonfarm payrolls increased 170k in March, compared to consensus of +180k and February’s 235k increase. The factor behind the potential donwside surprise are a “significant drag from unseasonable winter weather, which we believe may have boosted February payroll growth by 30-50k and could weigh on March growth by as much as 30-60k.” Some more details on the adverse weather impact:
We believe the sharp drop in temperatures and the early-month winter storms will depress payroll growth in weather-sensitive categories. Winter Storm Stella impacted the Midwest and East Coast early in the payroll survey week – and much of the snow that accumulated during the storm did not melt until Thursday or Friday. We believe the weather impact could be particularly large in comparison to February, which was marked by unseasonably warm weather and limited snowfall.
Alternatively, Goldman is not assuming a significant impact from the federal hiring freeze implemented in late January, which did not appear to materially affect the February report.
On the unemployment rate front, Goldman forecasts an unchanged print at 4.7%, as upside risk from a potential pause in household employment growth is offset by some scope for a pullback in the participation rate, following its sharp year-to-date increase. Not diverging from the consensus, Goldman expects AHE to increase 0.2% month over month and 2.7% year over year, reflecting tightening labor markets offset by slightly negative calendar effects.
Recent data: Despite the potential weather setback, Wednesday’s ADP employment report showed a another blowout number 263K against an expected 187K. Although it is not viewed as a an accurate indicator of Friday’s report, the strong data is part of a trend (previous five readings have been greater than 200K) of increasingly strong employment figures in the US. The strong ADP has caused many analysts to adjust higher their estimates for tomorrow’s NFP. Other data which affirms the upward trend came from further improvement in manufacturing employment surveys, a new cycle high for the Conference Board labor market differential, and continued low readings of initial jobless claims (despite an uptick in the final week).
Factors arguing for a stronger report (per Goldman):
– ADP. The payroll processing firm ADP reported a 263k rise in private payroll employment in March, a solid pace that sustantially exceeded expectations of +185k. In past research, we have found that large surprises in the ADP report tend to be predictive of a subsequent nonfarm payroll surprise. Offsetting this consideration, ADP’s February estimates were revised down significantly, and we believe some of the March strength reflects the lagged impact of accelerating nonfarm payroll growth (as well as the other financial and economic inputs to the ADP model). These factors, as well as differences in data collection methodologies, may be partially masking the impact of Winter Storm Stella, which we expect to manifest more visibly in tomorrow’s employment report. Nonetheless, the ADP data clearly imply a solid pace of underlying job growth.
The ADP report also showed another above-trend increase in construction (+49k) but a surprising decline of 32k in education employment. In the revamped ADP model, growth in these subindustries show strong correlations with their nonfarm payroll counterparts (0.74 and 0.75 since 2011, respectively). While some of the accuracy may reflect the impact of methodological revisions to the ADP regression model, it’s worth noting that the first vintage ADP reports also successfully anticipated the weak education payrolls growth in October 2016 as well as the strong construction job gains last month.
– Manufacturing sector surveys. Most employment components of manufacturing sector surveys were stronger in March. Notably, the ISM manufacturing employment component strengthened to its highest level since mid-2011 (+4.7pt to 58.9). The Philly Fed (+6.4pt to +17.5), Empire State (+6.8 to +8.8), and Richmond Fed (+10pt to +20) employment components all improved as well. On the softer side, the Kansas City Fed (-4pt to +13) and Dallas Fed (-1.2pt to +8.4) both pulled back in March, but remain at encouraging levels. The Chicago PMI employment component also reported a decline after a sharp gain in February. Manufacturing payroll employment rose 28k in March, its third consecutive increase.
– Job availability. The Conference Board’s Help Wanted Online (HWOL) report showed a modest increase in March online job postings (+2%), rebounding from February’s 7% drop. However, we continue to place limited weight on this indicator at the moment, in light of research by Fed economists that suggests the HWOL ad count has been depressed by higher prices for online job ads.
Arguing for a weaker report:
Winter Storm Stella. We believe the early-month winter storms are likely to exert a meaningful drag on March payrolls growth, as Winter Storm Stella hit the Midwest and East Coast at the beginning of the payrolls survey week. Because February was marked by unseasonably warm weather and limited snowfall, the month-to-month change in snowfall during the survey week was at its highest in the 12-year history of our dataset. Historically, swings of this magnitude have been associated with meaningful decelerations in weather-sensitive payroll categories, such as construction, retail, and leisure and hospitality (Exhibit 1).
Exhibit 1: Weather Likely Shifting from a Boost to Payroll Growth in February to a Drag in March
Regional granularity from the January and February payrolls data is also suggestive of a meaningful boost from weather, as payrolls in New England, Mid-Atlantic, and East North Central regions – all of which benefitted from a relatively mild winter in those months – increased 110k in January and 101k in February (compared to a 2016 average pace of +46k). Weather-sensitive industries in the regions contributed the bulk of this cumulative acceleration.
Looking ahead to March, one additional consideration is that the effects of Winter Storm Stella appear to have lingered throughout the survey week in many populated areas. We illustrate this in Exhibit 2, which plots daily snow cover in four major metropolitan areas across the Midwest and Northeast, based on weather-station data from the National Centers for Environmental Information (NCEI/NOAA). As a point of comparison, the snow produced by the January storms in the South – which did not appear to materially affect payrolls – had largely melted away by the Tuesday of that survey week. This increases our conviction at the margin that we should see evidence of a drag from weather in tomorrow’s report. Taken together, our base case expectations assume that weather boosted February payroll growth by roughly 30-50k. The payback for this and a slight weather-related payroll boost in January could take 30-60k off of March payroll growth, producing an overall weather-related swing of 60-110k.
Exhibit 2: In Contrast to the January Winter Storms in the South, Much of the Snow Accumulated During Winter Storm Stella Remained on the Ground during the Payrolls Survey Period
– Federal hiring freeze. The new administration’s hiring freeze for federal workers (excluding defense and public safety) went into effect on January 23rd, one week into the February payrolls survey period – but so far its impact appears quite limited, with federal payrolls actually increasing by 2k in February (mom sa). The impact also seems minor in the context of federal job growth during the 1981 federal hiring freeze at the start of the Reagan administration (Exhibit 3). Thus far, government departments may have been able to offset the hiring freeze through reduced attrition or increased contracted hiring, and these employer strategies may help explain the minimal impact of the hiring freeze in last month’s report. Accordingly, we expect only a modest drag from the freeze in tomorrow’s report and are assuming a flat reading for total government payrolls.
Exhibit 3: Federal Hiring Freeze Exerting Minimal Impact on Payrolls So Far
– Job cuts. Announced layoffs reported by Challenger, Gray & Christmas after our seasonal adjustment increased by 14k to 47k in March, a one-year high.
– Seasonals. Since 2010, March payroll growth has surprised negatively relative to consensus in five of the seven instances, with an average surprise of -43k. This may suggest some additional downside risk to the extent the BLS seasonal factors have not fully evolved to reflect this tendency.
– Labor supply constraints. We view the labor market as close to full employment, and as slack diminishes further, this should exert upward pressure on wages and potentially downward pressure on job growth – particularly as the unemployment rate in a given industry or geography falls meaningfully below its structural rate.
Neutral Factors:
– Service sector surveys. Employment components of service sector surveys were mixed in March, but all remained in expansionary territory. The ISM non-manufacturing (-3.6pt to 51.6), New York Fed (-4.4pt to +13.6, SA by GS), and Markit PMI Services employment components softened, but remain at levels consistent with expansion. Meanwhile, the Philly Fed (+4.8pt to +17.2), Richmond Fed (+10pt to +17), and Dallas Fed (+2.2pt to +8.1) non-manufacturing employment components moved higher. The key labor market subcomponent of the Consumer Confidence report rose to a 16-year high (+5.2pt to +12.2). Service sector payroll employment grew 132k in March and has increased 149k on average over the last six months.
– Jobless claims. Initial claims for unemployment insurance benefits remained stable overall at a very low level, averaging 247k during the four weeks between the February and March payroll survey periods. However, these averages mask a sharper rise during the payroll week itself that we believe reflected winter storm-related disruptions. Jobless claims rose 15k during the survey week and remained elevated by roughly that magnitude in the following week. Some of these filings likely reflected individuals who missed work during the survey period. Considering this, the underlying pace of jobless claims arguably improved further, consistent with our overarching view on payrolls: solid fundamentals offset by pronounced storm effects.
The WSJ’s 6 Things to Watch in the March Jobs report:
Hiring Momentum End: as Goldman below, WSJ warns, citing RBC economists, that the recent torrid pace of may be unsustainable due to warmer-than-usual weather. “Don’t be surprised if we see payback for this in March”
Construction Employment: the abnormally hot weather – especially during the second-hotted February on record – boosted construction hiring. The construction industry added 58,000 jobs in February, its strongest gain in a decade. The sector may have been the biggest beneficiary of unusually balmy weather, which would allow projects to start sooner and draw hiring into typically cooler winter months
Hiring freeze: President Donald Trump on Jan. 23 ordered a federal hiring freeze, which could start to show up in the March report
Average Hourly Earnings: Average hourly earnings rose 2.8% Y/Y last month, near the fastest pace of growth during the current cycle. A pickup in wage growth would signal employers are being forced to raise pay as the labor market tightens and workers gain more leverage. Sequentially, consensus expects a 0.2% increase.
Unemployment: The headline unemployment rate fell to 4.7% in February. While that’s a clear sign of improvement from earlier in the recovery, the figure only counts people actively looking for work. Those who have become discouraged or given up show up in different statistics. The broadest measure, which counts people who want full-time jobs but are stuck in part-time positions, was 9.2%, matching the lowest level since 2008.
Long-term decline in the participation rate: Rconomists, and Jamie Dimon recently, have been especially concerned with the long-term decline in the labor-force participation rate among those 25 to 54 years old–people who should be in their prime working years. The share of prime-age people either working or looking for work ticked up to 81.7% in February, its highest level since June 2011. If that trend continues, it would suggest enough decent jobs are being generated to keep people in the workforce.
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Fed impact: The impact upon the rate hike path from this release should be minimal, fed speak has been clear how many rate hikes are expected this year and one NFP reading is very unlikely to derail the plan — especially as employment metrics remain strong in the US economy. There are also wider factors at play affecting the Fed’s thinking, such as an inflated stock market, large balance sheet and the new trump administration’s proposed fiscal easing policies — labour market slack is not a primary concern of the Fed at this moment in time.
Market Reaction: As ever, fast money moves will surround the initial headline. It is worth noting that this report comes before a meeting in which the chances for a hike are small, and therefore its impact may be diminished. A stronger than expected number historically sends the USD higher and Treasuries lower and vice versa for a weaker number, before markets digest some of the other details of the report.
h/t: @RanSquawk
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