A Look At Tomorrow's Double Whammy Of Worsening NFP And Wholesale Prior Year Downward Labor Revisions

Tomorrow will likely be a jobs-predicated bloodbath. First, we will get the NFP data, which expectations have pegged at -5K (and for some reason Private payrolls still matter, even though the census impact is now negligible) but as Goldman is likely spot on with their estimate of -50K, and validated by recent ADP data, the finally number will be big miss to consensus. More importantly, as we highlighted in today's Frontrunning, tomorrow the Labor Department will announce a million-ballpark wholesale downward revision to 2009 employment numbers (due to birth-death and other perpetual upwardly biased adjustments), confirming that the jobs situation is far more dire than anything Joe Biden could have ever imagined. As the ever-optimistic Neil Dutta from BofA stated: "That adjustment is probably overstating the employment gains because we are in a very subdued recovery and the likelihood is that the birth-death factor is making the data look better than it otherwise would be." Tax records will probably show more businesses closed than initially estimated by the Labor Department, analysts said. This will certainly sour the mood, and the only saving grace will be how much of an impact the market will believe a near-certain QE2 will have on stocks (and has not been priced in yet). In the meantime, here is Goldman's latest view on why the labor picture in America is getting worse and worse.

A Slow Economy Means a Slow Labor Market (Tilton)

The September employment report will be released Friday at 8:30am.  We expect a below-consensus gain of 25,000 private sector payroll jobs and an increase in the unemployment rate to 9.7%.  A variety of labor market indicators, including this morning’s weak ADP Employment Report, look consistent with this forecast.   More simply, employment growth tends to follow GDP growth with a strong correlation and a slight lag – so weak growth data in recent months also points to job growth that is as soft or softer than that seen over the summer. We expect the Labor Department to announce a preliminary estimate of a small upward “benchmark revision” to payroll growth since March 2009.

This morning we changed our foreign exchange forecasts to reflect more broad dollar weakness stemming from the weak US growth outlook and (expected) renewal of asset purchases by the Federal Reserve.  A weaker dollar is one important channel through which asset purchases (or “quantitative easing”) could stimulate the economy, and one reason why we expect a modest reacceleration in growth over the course of 2011.  See GS Global Viewpoint 10/20, “New FX Forecasts: More Broad USD Weakness Ahead” for more details.

Last Friday we issued our preliminary forecasts for the September employment report: a drop of 50,000 payroll jobs, composed of an increase of 25,000 private sector and a decrease of 75,000 government jobs, a rise in the unemployment rate to 9.7%, and an increase in average hourly earnings by 0.1%.  Incremental information over the past three days has not changed our views.  Most leading indicators look quite weak:

1. Job advertising has stagnated.  Surveys of job advertising by the Conference Board and Monster.com show a substantial pickup in late 2009 followed by continued improvement in the first half of 2010.  But over the past two to three months they have stagnated, with the Monster survey actually showing a substantial seasonally-adjusted drop in August (this is the latest data point available for Monster, although it’s good enough for our purposes--our studies suggest job advertising leads payroll growth slightly, as one might expect).   

2. Business surveys are mixed.  The Institute for Supply Management’s manufacturing sector employment index declined from 60.4 in August to 56.5 in September, suggesting a slower rate of employment growth.  In contrast, its nonmanufacturing counterpart posted an improvement from 48.2 to 50.2 (this index has ranged between 48 and 51 since February).

3. Jobless claims are down, but largely for technical reasons.  New jobless claims averaged nearly 500,000 in the first two weeks of August but have improved somewhat since then; they averaged 461,000 in the final two weeks of the survey period.  This is probably the best piece of recent labor market news, but looking back over the year’s data, the early August figures look like an aberration; the more recent numbers are almost spot on the first-half average.  The total number of benefit recipients has also come down by nearly half a million since the August payroll survey was taken.  However, the main reason for this seems to be the increasing number of Americans who have exhausted all available benefit programs; if we add back these “exhaustees” to the number of current recipients, there has been little if any underlying improvement.

4. Consumer perceptions have become even more pessimistic.  Households’ perceptions of job availability continue to deteriorate.  In the latest Conference Board consumer confidence survey, only 3.8% of respondents characterized job availability as “plentiful”—a figure that has declined four out of the past five months—while 46.1% thought they were “hard to get.”  The differential of -42.3% is exceptionally weak by historical standards.

5.  The ADP Employment Report disappointed.  Market participants got an unpleasant surprise this morning when ADP estimated a decline of 39,000 private sector payroll jobs in September, well below consensus expectations of a 20,000 gain.  Based on current BLS and ADP estimates, the ADP report has underestimated private sector payrolls by about 50,000 per month over the last three months, and about 70,000 per month over the last six months.  If we assume this general bias persists and make an adjustment in this range, this morning’s report would be broadly consistent with our estimate of +25,000 for private sector payrolls.

A large majority of the evidence therefore points to slow employment growth in September.  More simply, real GDP growth was weak in Q2 (1.6% annualized) and does not seem to have reaccelerated since then.  Since employment growth typically follows GDP growth with a slight lag, it would be odd for payrolls to show substantial improvement in the near term.

As for the public sector, by far the most important factor this month relates to temporary Census employment – nearly all the remaining temporary workers finished their contracts by the payroll survey week (the week of September 12-18).  This represents a decline of about 78,000 Census workers from the prior month, and essentially explains the difference between our private-sector and total employment estimates.  Other factors include ongoing budget pressures forcing cutbacks at the state and local level, which have been offset to some extent in recent months by a small amount of federal non-Census hiring, and the possibility that temporary poll workers for primary elections in certain states (including New York) may have been counted in payrolls this year even though they were not in the past.   We have assumed these factors play little role on net in the public sector payroll change, so our forecast for total payrolls is -50,000.

We expect the unemployment rate to edge up to 9.7% in September.  Although the household and payroll surveys of employment can and often do move in different directions in a given month, our expectation of a decline in total payrolls in September suggests a decline in employment in the household survey (the survey used to calculate the unemployment rate) is also more likely than not.  Unless those job losers depart the labor force entirely—certainly a possibility, but seemingly less likely with the labor force participation rate already at a quarter-century low—this implies some rise in the number of unemployed.  And with unemployment at 9.64% in August, it would take only a small increase in the number of unemployed for the rate to round up to 9.7%.

The September payroll report normally features the Labor Department’s preliminary estimate of its annual “benchmark” revision to payrolls.  The benchmark is the process by which initial survey estimates of employment are “trued up” to near-complete counts of employment from state unemployment insurance records.  The complete counts are available only with a lag of about nine months—each January’s payroll report provides the updated benchmark level of employment for the prior March—hence the rationale for the more up-to-date payroll survey measure.  With three of four quarters of comprehensive data now available (April through December 2009), the Labor Department is in a position to provide a preliminary estimate for the size of this revision.  We can get a sense of how large it might be by comparing the growth of payrolls in the comprehensive count (available in the Quarterly Census of Employment and Wages or QCEW) from March-December 2009 with the growth in payrolls from the survey results over that period.  The payroll survey shows a loss of 727,000 jobs on a non-seasonally adjusted basis while the QCEW shows a loss of 588,000. That is, the QCEW implies that the payroll survey underestimated job growth by 139,000 over these nine months; if we extrapolate this to twelve months the underestimate would be 185,000.  Therefore, we expect the preliminary estimate to be an upward revision to payrolls of approximately this magnitude.  This would be a much smaller adjustment than last year (a downward revision of more than 900,000) and a relatively small one in historical terms. 


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