The Glass-Half-Full, Glass-Half-Broken 'Goldilocks' Payroll Preview

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Is bad, good still? Did Draghi's omnipotence obfuscate Bernanke's banality? Goldman's Jan Hatzius provides some color on what to expect for tomorrow's employment report. Forecasting a Goldilocks 'middling' print around 125k and flat 8.3% unemployment rate, he reminds us that this report is a very important one from both a monetary policy and political perspective. An upside surprise would raise more doubts about the Fed's determination to ease aggressively at next week's meeting and would strengthen President Obama's hand in the run-up to the November 6 election, and the converse is also true.

 

Goldman Sachs:Payroll Preview, Middling

We expect a middling August employment report, with a 125,000 gain in nonfarm payrolls and a flat 8.3% unemployment rate. This reflects conflicting signals from the indicators we use in our payroll models. On the positive side, initial jobless claims, the non-manufacturing ISM employment index, and the ADP report have all looked a bit better; in addition, strike effects should also be positive. On the negative side, job advertising, household employment perceptions, the manufacturing ISM, and broader growth measures such as our CAI all point to a weak report. Our forecast essentially splits the difference.

The July employment report was an upside surprise, at least as far as the establishment survey was concerned, as nonfarm payrolls grew 163,000 vs. an average of 73,000 in the prior three months. Will the August report, released at 8.30am on Friday, September 7, provide another reason for cheer?

There are certainly some reasons for optimism:

  1. Initial jobless claims have fallen, both between survey weeks (374,000 in August vs. 388,000 in July) and on a 4-week moving average basis.
  2. The nonmanufacturing ISM employment index improved significantly in August to a reading of 53.8, the strongest since April.
  3. A positive surprise in the ADP employment report, with a 201,000 gain, the strongest since March.
  4. A positive strike effect, as the net effect of changes in the number of striking workers will add 8,500 to the payroll gain vs. a 4,900 subtraction in July.

Despite these positive signals, on balance we view the July report as an outlier, and expect only a 125,000 gain in August (broadly in line with the consensus):

  1. The July payroll gain overstated that month's underlying strength. The headline number was good, but it benefited from a bounceback in essentially non-cyclical sectors such as education and health services. This will probably not be repeated. Moreover, the household survey was much less good, as household employment declined and the unemployment rate increased.
  2. Help-wanted advertising has been a disappointment recently. The Conference Board measure declined in both July and August, and the Monster.com index was also down in seasonally adjusted terms in July (August data not yet available).
  3. Household perceptions of job availability have stayed weak, as the differential between respondents who view jobs as "plentiful" versus "hard to get" in the Conference Board survey edged down in August to the weakest level since January.
  4. The ISM manufacturing index disappointed, with both the composite and the employment index falling to the weakest reading since 2009.
  5. Overall economic activity remains sluggish. While our Current Activity Indicator (CAI) picked up a bit to 1.4% in July, this is too slow to support healthy employment growth in the medium term. Moreover, the indicators released so far point to a weak CAI in August (we will release a preliminary version with Friday's employment numbers in hand).

This report is a very important one from both a monetary policy and political perspective. An upside surprise would raise more doubts about the Fed's determination to ease aggressively at next week's meeting and would strengthen President Obama's hand in the runup to the November 6 election, and the converse is also true.

 

Of course, we suspect no matter what the data point comes at (barring extreme outliers), it will be spun in a Goldilocks manner by left, right, long-only manager, and central planner banker alike - not too hot to totally remove QE hope, and not too cold as to crush Obama's hopes and dreams... (cue gratuitous Goldilocks costume)...