June Payrolls Preview: With The Fed On Autopilot, You Can Skip This One
After a poor March jobs report, followed by an April scorcher, then another debacle in May, the June payrolls report due at 8:30am will be… very much irrelevant, because as Citi pointed out earlier, the Fed is now data-independent and will keep hiking until financial conditions finally tighten (read: stocks drop). In other words, with the Fed on autopilot, feel free to skip this one – it hardly matters. For what it’s worth, here are the consensus expectations for tomorrow’s report:
- June Nonfarm Payrolls Exp. 179K vs May 138K
- Unemployment Rate Exp. 4.3% vs May 4.3%
- Average Hourly Earnings M/M Exp. 0.3%, vs May 0.2%; Y/Y Exp. 2.60%, vs May 2.50%
Courtesy of RanSquawk, here is a detailed breakdown of expectations:
HEADLINE NFP: Analysts expect 179k nonfarm payrolls will be added to the US economy in June, against 138k added in May. Headline payroll growth has eased: The three-month rolling-average of the headline is running at a 121k clip, the slowest since July 2012, suggesting the pace of slack erosion is easing.
- Analysts at Barclays, who are more-or-less in line with the consensus view, write “factors influencing our forecast include initial claims, which continue to point to low rates of job separation, and the timing of the survey week in May.” The bank says claims have been pointing toward stronger payroll growth for some time too, but add that “in the other direction are calendar-day effects that we believe held back reported employment last month.”
JOBLESS RATE: The unemployment rate is seen steady at 4.3%; the FOMC has forecast that the jobless rate will end-2017 at that level, while it recently cut its projection of NAIRU (non-accelerating inflation rate of unemployment) to between 4.5-4.8%; in June 2016, that estimate stood at between 4.7-5.0%. Given that the jobless rate is beneath the NAIRU estimate, many are once again focusing on the U6 measure of unemployment, which was running at 8.4% in May.
WAGE GROWTH: Given that the labor market supposedly is tight, and the path of monetary policy is contingent on the progress of inflation, attention will be on the gauges of wage growth. The consensus view looks for average hourly earnings Y/Y to decrease to 2.6% from 2.5%, but the M/M measure is seen rising by 0.1ppts to 0.3% due to calendar effects.
- Analysts at CitiFX suggest that the USD is most sensitive to surprises on wages. But the bank notes that “a strong wage print would still not allay concerns on inflation where shelter, healthcare and apparel have represented a bigger drag than expected,” but add “a stronger wage print would strengthen conviction however that slack has been exhausted and potential growth is falling.”
- The market pricing of interest rate hikes is more pessimistic than the FOMC’s projections, with the former pricing in three hikes through 2019 versus the Fed’s forecast looking for seven. One theory explaining this discrepancy is that the Fed’s longer-term projection of the Federal Fund rate around 3% is too optimistic, and a lack of growth in the medium term may mean that the peak in the cycle is lower than its projection. Another part of this is that with weak inflationary pressures, there isn’t much reason for rates to jump higher. Accordingly, inflation data, as gauged by PCE, core PCE, CPI and wage growth, will be key in shaping expectations of inflation, and thus the trajectory of Fed policy.
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We estimate nonfarm payrolls rose 180k in June, following a 138k increase in May and compared to three- and six-month moving averages of 121k and 161k, respectively. Labor market fundamentals were mixed in June. While business employment surveys remained at strong levels and the Conference Board’s labor market differential rose to a new cycle high, initial jobless claims drifted higher and continuing claims increased for five consecutive weeks. In terms of one-off effects, we expect payroll growth to benefit from the arrival of students and recent graduates into the labor force, following a pronounced drop in youth participation rates in May likely caused by the timing of the survey week. While this would suggest scope for reacceleration in payroll growth, it would also suggest upward pressure on the unemployment rate, as students begin their summer job searches. While we expect the unemployment rate to remain stable at 4.3%, we note potential upside risks accordingly.
On wages, Goldman is optimistic this time, mostly due to a favorable calendar effects;
We estimate average hourly earnings increased 0.3% month over month and 2.6% year over year in June, reflecting the interaction of firming wage growth with somewhat favorable calendar effects. We view the risks to the year-over-year number as skewed to the upside. The June payroll period ended on the 17th, which in our model is associated with somewhat above-average wage growth, and we are constructive on wage growth more generally, exemplified by the acceleration in the employment cost index to a cycle-high pace in Q1.
Factors arguing for a stronger report:
- Youth Employment Rebound. We believe some of the May weakness in both payrolls and labor force participation reflected the timing of student summer hiring. Details of the household survey show that job growth and participation were particularly weak among young people: despite representing less than 15% of the workforce, 16-24-year-olds drove three fifths of the overall drop in household employment (-158k of -252k, mom sa) and three quarters of the drop in the labor force (-306k of -419k). As a result, the unemployment rate among this segment declined sharply to its lowest level in nearly 50 years (-0.6pp to 8.8%). In contrast, unemployment rates were stable among respondents 25 years and older. We suspect the relatively early May survey week may have contributed here. As shown in Exhibit 1, the size of the youth labor force is relatively volatile and mean-reverting, and sharp moves in May tend to reverse in June (correlation of -0.60 in May/June since 1990). The same relationship holds for youth monthly employment growth in those months (correlation of -0.49). The unwinding of these effects suggests scope for accelerating job growth (in both the household and establishment survey) and potentially upward pressure on the unemployment rate (reflecting a possible rebound in labor force participation).
Exhibit 1: Youth Labor Force Entry Should Put Upward Pressure on Payrolls
- Manufacturing sector surveys. Employment components of manufacturing sector surveys were generally encouraging on net in June. The ISM manufacturing employment component improved for a second month (+3.7pt to 57.2), and both the Dallas Fed and Kansas City Fed employment subindices also moved higher. However, the Philly Fed, NY Fed, Richmond Fed, Chicago Fed and Markit PMI employment components all fell in June. Our overall manufacturing employment tracker edged higher by 0.3pt to 56.0. Manufacturing payroll employment edged down 1k in May, its first outright decline in seven months, and has increased 12k on average over the last six months.
- Service sector surveys. Service-sector employment surveys have been mixed in June but remained at generally high levels, with the ISM non-manufacturing survey falling to 55.8 in June (from a one year high of 57.8 in May). Our overall non-manufacturing employment tracker increased 0.7pt to 54.8 in June, with gains in the Philly Fed and Dallas Fed employment subindices but deterioration in the New York Fed and Richmond Fed measures. Encouragingly, the key labor market subcomponent of the Consumer Confidence report strengthened 3.1pt to 14.8, a 16-year high. Service sector payroll employment grew 131k in May and has increased 122k on average over the last six months.
Factors arguing for a weaker report:
- Jobless claims. Initial claims for unemployment insurance benefits rebounded somewhat, averaging 243k during the five weeks between the May and June payroll survey periods, up from a cycle low of 241k on average during the prior-month period. Additionally, continuing claims rose by 21k from survey week to survey week and have now risen for five consecutive weeks.
- Continued retail weakness. Retail employment growth has fallen from its historical trend of 15-20k per month to -20k on average over the past four months. We believe the structural shift of retail sales from brick and mortar stores toward less labor-intensive e-commerce firms will continue to weigh on payrolls growth in that industry, with the impact on the order of 10k per month relative to its previous trend. This drag on retail employment has appeared particularly pronounced recently, and we note the possibility that weak brick and mortar sales trends this year may be accelerating the pace of this structural shift.
- ADP. The payroll processing firm ADP reported a 158k increase in private payroll employment in June – below consensus expectations and its slowest pace of the year. However, we believe that some of the sequential softness in the report likely reflected weakness in the financial and economic indicators also used in the ADP model, making it difficult to tease out the underlying signal regarding the pace of job growth. Exhibit 2 shows the relationship between ADP surprises (vs. consensus based on first-reported ADP) and non-farm payrolls surprises, which appears rather limited outside of large surprises.
- Labor supply constraints. We view the labor market as close to full employment, and as slack diminishes further, this should exert both upward pressure on wages and downward pressure on job growth. However, labor supply constraints historically appear less binding in June, perhaps reflecting the entry of students and recent graduates into the labor force. As shown in Exhibit 3, in years with relatively tight labor markets, payroll growth tends to slow during the spring but then reaccelerate in June/July. One potential driver of this June reacceleration is that firms may hire more graduates and students on summer vacation if they had difficulty filling positions earlier in the year.
- Job availability. The Conference Board’s Help Wanted Online (HWOL) report showed a 1.0% pullback in June online job postings following May’s 4.2% increase. 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.
- Job cuts. Announced layoffs reported by Challenger, Gray & Christmas after our seasonal adjustment declined modestly (-5k to 35k), near the middle of its recent range. On a year-over-year basis, announced job cuts declined by 8k.
- Seasonals. Since 2010, June payroll growth has surprised positively relative to consensus in four of the seven instances with an average surprise of +14k. We don’t view this as compelling evidence of a systematic bias in June.
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Other Labor Market Considerations:
CLAIMS: On a four-week moving average basis, initial jobless claims are at 243k going into June’s employment situation report; though that is technically a touch higher than the 239.75k four-week moving average heading into May’s employment report, it is essentially flat, and stable. Continuing claims have, however, edged up on the four-week moving average basis to 1.944mln from 1.918mln before the previous NFP report.
ADP: The ADP reported 158k payrolls were added to the US economy in June; analysts had expected a print of 185k versus the prior (downwardly revised) 230k. However, the report is “very likely to understate the official payroll number,” write analysts at Pantheon Macroeconomics. Pantheon explains that “ADP’s number is generated from a model which includes lagged official payroll numbers, so the soft May number, 147K for private payrolls, has pulled down today’s ADP”. It adds that May’s official number was hit be a seasonal adjustment issues, which likely won’t reverse in full in June, but definitely will not be repeated. “Payrolls should therefore revert to the trend implied by a host of survey data, at least.”
JOB CUTS: US employers announced intentions to trim payrolls by 31,105 jobs in June, Challenger reported, which is the lowest monthly total in 2017, 6% lower than May’s number, and 19% lower than June 2016. The consultancy also reported that job cuts had declined 28% in the first half of the year. “The pace of job cutting is significantly slower compared to the first half of last year,” Challenger said, adding “in a tight labour market, it’s no surprise companies are holding on to their existing workforces. Companies are also waiting to see how proposed regulations from the Trump administration may impact business going forward.”
BUSINESS SURVEYS: The non-manufacturing ISM report indicated a slight easing in labour market conditions, with the employment sub-index falling by 2 points to 55.8, though the measure has been in expansion (above 50) for 40 consecutive months. Markit, another survey compiler, noted that in its own services PMI, employment growth remained strong in June, with the pace of job creation at the fastest since February. The manufacturing ISM, meanwhile, reported an acceleration in labour market conditions, with the employment sub-index rising by 3.7 points to 57.2 to print the ninth straight month in expansion.