Goldman's Payroll Preview: Optimistic But Worried About Weather

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Goldman forecasts a gain of 200k non-farm payroll jobs tomorrow (against a 196k consensus +/-25k). Factors arguing for a solid print include the recent trend, an improvement in most employment indicators already released for the month, the compressed holiday hiring period, and a potential "couriers and messengers effect." On the negative side, Goldman warns cold weather is a downside risk. With respect to other aspects of the release, in general they note that the December report has not shown an overwhelming tendency to contain back-revisions in one direction or the other; and forecast an unchanged unemployment rate at 7.0%, and a 0.2% month-on-month gain in average hourly earnings.

 

Top of the pile is the one and only Joe Lavorgna of Deutsche at 250k with Toby Dayton of LinkUp bringing up the rear with 100k (and apparently only 77 of the 90 estimates are from "qualified economists")

 

Via Goldman Sachs' Kris Dawsey,

A number of factors point to a solid report:

1. Sturdy recent trend. Payroll job gains have been running at 180,000 - 200,000/mo on a trend basis recently. Our labor market tracker, which aggregates a number of key labor market indicators into a single summary measure, was consistent with 190,000/mo payroll job growth on a three-month average basis through November.

2. Improving labor differential. The Conference Board's labor differential?the net percent of respondents in the consumer confidence survey reporting jobs plentiful vs. jobs hard to get?rose further in December, continuing its uptrend over the past two years.

3. Better ISM services employment index. Although the ISM services report taken as a whole was softer than expected in December, the employment component rose 3.3pt to 55.8. With most responses received late in the month, the improvement may also reflect on January payrolls given the early- to mid-month timing of the payroll reference period (pay period including the 12th of the month).

4. Strong ADP report. ADP employment posted a strong 238,000 gain in December, the strongest initial print since the index methodology was revised in 2012. Although a stronger-than-expected ADP report foreshadowed a larger-than-expected payroll gain in November, the ADP report has yet to prove itself as a reliable indicator of the official payrolls estimate.

5. Lower layoffs. According to the Challenger, Gray, and Christmas layoff report, announced job cuts in December were the lowest in 13 years, declining 5.9% year-over-year.

6. Compressed holiday hiring period. Because of the late timing of Thanksgiving and Black Friday, holiday hiring was likely somewhat more compressed this year between the November and December payroll reference periods. This could result in a stronger December gain.

7. Potential couriers and messengers effect. Seasonal hiring of couriers and messengers has increased significantly in recent years as an increasing share of holiday shopping is done online and as such must be delivered. This year, some large firms reportedly increased seasonal hiring above the levels seen in prior years. However, as shown in Exhibit 1 seasonal adjustment difficulty associated with the couriers and messengers category has resulted in increasing volatility in recent years. This is a significant question mark for the December report.

A few other signals were mixed to negative:

1. Higher jobless claims. The four-week moving average of initial jobless claims edged higher by 4,500 from the November to December reference weeks. However, initial jobless claims are typically volatile between Thanksgiving and the early weeks of the new year, so we take little signal from the uptick.

2. Mixed online job ads. The conference Board's monthly measure of online job advertising was mixed in December, with total ads rising but new ads falling. The data were similarly mixed on a three-month change basis.

3. Bad weather. Exhibit 2 shows the deviation in heating degree days from longer-term averages over the past several years. Weather was particularly cold during the December reference period, potentially subtracting around 10,000 from payroll job growth. Weather-sensitive sectors such as construction and leisure & hospitality (ex-ski industry) would be expected to show a disproportionate hit from colder-than-normal weather. The weather could also negatively influence the average weekly hours series.

The longer-term average revision to October and November payrolls found in the December report is roughly zero. However, over the past four years (post-recession) the average two-month revision in the December report has been +19,000, with substantial dispersion. Overall, the December report has not shown an overwhelming tendency to contain back-revisions in one direction or the other.

Regarding other aspects of the employment report, we expect the unemployment rate to remain at 7.0% (from an unrounded 7.0235% in November). Potential distortions to the unemployment rate associated with the expiration of emergency unemployment benefits would not become apparent until the January report. Average hourly earnings likely rose 0.2% month-on-month, in line with their recent trend.