Via Goldman Sachs,
We expect nonfarm payroll job growth of 230k in December, slightly below the consensus forecast of 240k.
[11]
As it seems consensus opinion is tracking stocks (or vice versa) pretty closely into the print...
[12]
Labor market indicators continue to point to a strong pace of employment gains, but softened on balance in December. In particular, jobless claims rose modestly and the employment components of service sector business surveys weakened somewhat. We expect that employment gains will push the unemployment rate down one-tenth to 5.7%. With respect to wages, we expect a softer +0.1% gain in average hourly earnings following an unusually large gain in November.
We forecast nonfarm payroll job growth of 230k in December, slightly below the consensus forecast of 240k. We also expect a modestly positive two-month back-revision. Payroll employment growth surprised on the upside in November at 321k, the largest gain in nearly three years, and has averaged a healthy 228k over the last 12 months. On balance, labor market indicators looked somewhat softer in December, but remain consistent with a solid trend rate of employment growth.
Arguing for a stronger report:
Job availability. The Conference Board's labor differential—the net percent of households reporting jobs as plentiful vs. hard to get—improved by 1.9pt in December to -10.6.
Arguing for a weaker report:
Jobless claims. The four-week moving average of initial jobless claims leading into the payroll reference week rose 11k to 299k.
Service sector surveys. The ISM nonmanufacturing employment index—which we have found to be one of the better predictors of nonfarm payrolls—fell a modest 0.7pt to 56.0. The employment component of the Markit services PMI fell to its softest rate of expansion in eight months, the employment component of the Richmond Fed survey dipped as well (-8pt to +16), and the Dallas Fed survey weakened slightly. Only the NY Fed service sector survey strengthened slightly. The service sector was the largest contributor to the upside surprise on payrolls in November with job gains of 266k, well above the 211k average gain seen over the past six months.
ADP report. The ADP employment report exceeded consensus expectations in December with a 241k gain. However, our model incorporating the other indicators that ADP uses to produce its final estimate suggests that ADP's underlying employment data was likely a bit softer in December. In general, initial print ADP estimates have not been strongly correlated with initial print payroll gains reported by the Labor Department.
Job cuts. According to the Challenger, Gray and Christmas report, job cuts rose slightly on a seasonally-adjusted basis in December, though they remained at a low level. In particular, seasonally-adjusted job cuts in the energy sector jumped in December to the highest level since late 2012.
Neutral factors:
Online job ads. According to the Conference Board's Help Wanted Online (HWOL) report, online job ads posted a decent gain in November but then fell back to roughly the recent trend in December. Because ads are an early indicator of employment gains, we take the overall signal here as roughly neutral.
Manufacturing employment indicators. The employment components of the manufacturing surveys were mixed relative to November, but remained at levels consistent with solid employment growth. While the Philly Fed survey dropped sharply (-15.2pt to 7.2), the ISM (+1.9pt to 56.8), Chicago (+2.5pt to 56.9), and Richmond surveys (+2pt to 13) showed moderate gains, and the Empire, Kansas City, and Dallas surveys were roughly unchanged. Payroll employment growth in the manufacturing sector picked up to +28k in November and has averaged a healthy 18k over the last six months.
Weather. Our method for estimating the impact on payrolls of temperature deviations from seasonal norms suggests moderate upside in December following a swing from colder-than-usual temperatures in November to warmer-than-usual temperatures in December. However, the Regional Snowfall Index registered a minor snowstorm during the December survey week and another two weeks prior. As a result, we do not expect to see a major net weather effect in an unusual warm-yet-snowy December.
We expect solid employment gains to push the unemployment rate down to 5.7% in December from an unrounded 5.825% in November. Employment gains reported in the household survey have been erratic lately, but on a six-month average basis are now roughly in line with payroll gains reported in the establishment survey. While the participation rate appears to have stabilized since late-2013, ending the gradual decline that began in late 2008, job gains have been strong enough to push the headline unemployment rate down by 1.2 percentage points (pp) over the last year and to push the U6 underemployment rate down 1.7pp to 11.8%. According to the latest Summary of Economic Projections, the FOMC views the structural rate of headline unemployment as roughly 5.35%, while the Fed staff's estimate is likely lower.
We expect average hourly earnings for all workers to grow a more modest 0.1% in December following a higher-than-usual 0.4% gain in November. The softer 0.2% gain in average hourly earnings for production & non-supervisory workers last month also suggests some possible payback in the all-workers series in December. Over the past year, average hourly earnings for all workers rose 2.1% and our wage tracker rose 2.3%, still well below the 3%-4% rate that Fed Chair Janet Yellen has identified as normal.
