US jobs preview

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Tonight is the monthly US jobs report and obviously markets are going into it pretty loaded. A stronger than expected report will kill the bear market rally in risk but a weak report will give it another leg up. Calculated Risk offers a couple of previews:

The consensus, according to Bloomberg, is for an increase of 188,000 non-farm payroll jobs in January (with a range of estimates between 170,000 to 215,000), and for the unemployment rate to be unchanged at 5.0%.

The BLS reported 292,000 jobs added in December.

Note on Revisions: With the January release, the BLS will introduce revisions to nonfarm payroll employment to reflect the annual benchmark adjustment. The preliminary annual benchmark revision showed a downward adjustment of 208,000 jobs, and the preliminary estimate is usually pretty close.

Here is a summary of recent data:

• The ADP employment report showed an increase of 205,000 private sector payroll jobs in January. This was above expectations of 190,000 private sector payroll jobs added. The ADP report hasn’t been very useful in predicting the BLS report for any one month, but in general, this suggests employment growth above expectations.

• The ISM manufacturing employment index decreased in January to 45.9%. A historical correlation between the ISM manufacturing employment index and the BLS employment report for manufacturing, suggests that private sector BLS manufacturing payroll jobs decreased about 40,000 in December. The ADP report indicated no change for manufacturing jobs. Note: Recently the ADP has been a better predictor for BLS reported manufacturing employment than the ISM survey.

The ISM non-manufacturing employment index decreased in December to 52.1%. A historical correlation between the ISM non-manufacturing employment index and the BLS employment report for non-manufacturing, suggests that private sector BLS non-manufacturing payroll jobs increased about 130,000 in January.

Combined, the ISM indexes suggests employment gains of 90,000. This suggests employment growth below expectations.

Initial weekly unemployment claims averaged close to 283,000 in January, up from 275,000 in December. For the BLS reference week (includes the 12th of the month), initial claims were at 294,000, up from 271,000 during the reference week in December.

The increase during the reference suggests more layoffs in January as compared to December.

• The final January University of Michigan consumer sentiment index decreased to 92.0 from the December reading of 92.6. Sentiment is frequently coincident with changes in the labor market, but there are other factors too – like lower gasoline prices.

• Conclusion: Unfortunately none of the indicators above is very good at predicting the initial BLS employment report. However, based on these indicators, it appears job gains will be below consensus.

Goldman agrees:

January Payrolls Preview We expect a 170k gain in nonfarm payroll employment in January, below consensus expectations of 190k. … We expect the unemployment rate to remain unchanged at 5.0% in January on a rounded basis … However, we see some risk that the unemployment rate will round down to 4.9% given our expectation for a strong employment gain and the possibility of a slight decline in participation …

We expect average hourly earnings for all workers to rise 0.4% (mom) in January following a 0.04% decline in December. Our expectation for a firmer than usual rise in average hourly earnings growth is primarily due to favorable calendar effects. In addition, we estimate that minimum wage increases in about a dozen states could boost aggregate average hourly earnings by about 0.05%. However, even a 0.4% increase in January would result in a decline in the year-on-year rate to 2.3% due to unfavorable base effects.

And BofAML:

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NFP Preview: Employment growth likely slowed in January with nonfarm payrolls rising by 170,000.This follows a robust 2015 finish, as jobs increased by an average of 284,000 in the final three months. Exceptionally favorable weather, particularly in December, provided a boost to the data. Our models suggest that there will be some payback in the following month and an even larger payback two months later. The major snowstorm that hit the East Coast won’t play a role in the January figures since it was after the survey week; it could matter for February, however.

Outside of the weather, we see reasons for some weakening in the trend given the modest uptick in jobless claims and a minor drop in the Conference Board’s labor market differential.

On a sector basis, we think mining continued to shed jobs amid depreciating oil prices, and manufacturing was stagnant. Construction is particularly sensitive to weather and ramped up in 4Q, so there is a high risk of weakening. On the flip side, services sector jobs growth likely remained solid. We also look for government to rise by 5,000, which implies private sector job growth of 165,000.

We expect the unemployment rate to remain unchanged at 5.0%.Meanwhile, average hourly earnings should rise 0.3% mom with upside risk, following no gain in December. The base effects reverse between December and January. They were favorable in December, boosting the yoy rate to 2.5%, but even with a 0.3% mom increase this month, we would see deceleration to 2.2% yoy.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.