January Payrolls Preview: Mind The Half A Million Downward Revision

Following a blockbuster ADP private payrolls print of 291K, the highest in nearly 5 years, analysts expect the pace of official, BLS payroll growth to pick up (160k expected, up from 145K in January), though remain beneath recent trend rates; yet despite the ADP strength, which in the past has been a loud contrarian indicator, analysts offer the usual caveats: business surveys continue to point to payrolls growth, though the pace of growth cooled in the non-manufacturing survey. Weekly jobless claims data has stabilized near lows. Meanwhile, consumer confidence surveys bode well, with consumers expecting to see more jobs in the months ahead, though their view on wage gains pared very slightly.

Also of note, tomorrow’s report will be accompanied by the annual benchmark revision to the establishment survey, as well as the annual introduction of new population controls in the household survey. The BLS’s preliminary estimate of the establishment survey revision suggested a large downward adjustment of 501k to the level of March 2019 employment. This would imply a 42k slower pace of monthly job growth on average from April 2018 to March 2019 (+168k vs. +210k as currently reported). Revisions in the preliminary report were fairly evenly split between retail (-146k), professional services (-163k), and leisure (-175k), and focus on the BLS' erroneous birth-death adjustments.

Courtesy of RanSquawk, here is what Wall Street expects:

  • Non-farm Payrolls: Exp. 160k, Prev. 145k.
  • Unemployment Rate: Exp. 3.5%, Prev. 3.5%. (FOMC currently projects 3.5% at end-2019, and 4.1% in the long run).
  • Avg. Earnings M/M: Exp. 0.3%, Prev. 0.1%.
  • Avg. Earnings Y/Y: Exp. 3.0%, Prev. 2.9%.
  • Avg. Work Week Hours: Exp. 34.3hrs, Prev. 34.3hrs.
  • Private Payrolls: Exp. 150k, Prev. 139k.
  • Manufacturing Payrolls: Exp. -5k, Prev. -12k.
  • Government Payrolls: Prev. 6.0k.
  • U6 Unemployment Rate: Prev. 6.7%.
  • Labour Force Participation: Exp. 63.1%, Prev. 63.2%.

TREND RATES:

The pace of payroll additions has eased, after the sub-trend 145k added in December. Currently, the 3-month average is 184k, running a touch beneath the 6-month pace at 189k, though both still remain above the 12-month average at 176k. Goldman estimates payrolls increased 190k in January, higher than consensus, and does not expect a significant impact
from Census employment in tomorrow’s report. Wells Fargo's analysts argue that slower growth in the labor supply during this expansion has reduced the 'breakeven' number for job growth (the amount of new jobs needed to reduce the jobless rate from trend). Wells says that the weaker pace of job growth in 2019 generated little cause for concern that fundamentals in the labor market were deteriorating meaningfully. It estimates that a pace of around 85-130k monthly job additions would be required to put downward pressure on the unemployment rate, due primarily to strong labor participation trends. Trump, in his State of the Union address Tuesday, highlighted numbers such as 7 million jobs created since his election and the lowest recorded unemployment levels for African Americans, Hispanics and Asian Americans.

INITIAL JOBLESS CLAIMS:

Weekly data for the payroll survey period came in at 223k (four-week average was 216.25k) compared to the 235k in the December reference period (four-week average then was 225.75k), auguring well for January's report. After the data's release, Pantheon Macroeconomics suggested that the underlying trend in claims was not rising, and might, perhaps, be falling again. "All the slowdown in payroll growth from the 2018 peak has been due to slower gross hiring, not rising layoffs. The spike in late December, which triggered a degree of consternation among some investors, has now reversed."

REVISIONS:

Revisions may show “the past wasn’t as rosy as we thought,” said Ward McCarthy, chief financial economist at Jefferies LLC. "That’s again another reason to think that the deceleration in payroll growth is something we’re going to be living with going forward." Yet even a big downward revision to payrolls won’t change the overall picture of labor-market tightness. The participation rate for prime-age workers, or those ages 25 to 54, is the highest in a decade according to Bloomberg. Fed Chair Jerome Powell has reiterated his desire to sustain the expansion “so that the strong job market reaches more of those left behind.” Companies complain about finding qualified workers, and job openings, though declining, still outnumber the unemployed. "You can’t change that story at all with revisions,” said Jennifer Lee, a senior economist at BMO Capital Markets. “Just perhaps the pace.”

ADP PAYROLLS:

The ADP's gauge of payrolls surprised to the upside in January, printing 291k against an expected 156k. Analysts provided the usual caveats about how, although the better-than-expected data will bolster expectations of a beat in the official NFP data on Friday, the accuracy and exact correlation of the two data sets gives reasons to be cautious. Capital Economics explains that this scepticism is doubled every January, because firms tend to purge names from the payroll at the start of the year – even though those people may not have done any paid work for that firm for several months. "That distortion occasionally used to generate very weak readings at the start of the year but, in this case, it looks like the ADP could have over-compensated with an adjustment," CapEco says. Meanwhile, the ADP itself suggested that mild winter weather provided a significant boost to the January employment gain, and adds that underlying job growth is close to +125k monthly pace, which is consistent with low and stable unemployment.

BUSINESS SURVEYS:

The manufacturing ISM report in January noted that labour was reported to be in short supply, and panellist comments were generally positive regarding future employment potential. The manufacturing employment sub-index, however, rose to 46.6 from December's 45.2. Meanwhile, the non-manufacturing ISM report saw the employment sub-component fall a touch to 53.1 from a revised down 54.8; the non-manufacturing gauge also noted that respondents continued to have difficulty with labour resources, and was impacting capacity and pushing up costs.

CONSUMER CONFIDENCE:

The Street expects the jobless rate to remain at 3.5%, a rate which the Fed's January projections had penciled in for the end of 2020. In terms of wage growth, the Street looks for a pick-up to 0.3% M/M in January from a pace of 0.1% in December, while the Y/Y rate is seen rising to 3.0% in January after falling to 2.9% (from 3.1%) in December. Within the Conference Board's consumer confidence report, the differential between jobs 'plentiful' and jobs 'hard to get' rose sharply to 37.4 in Jan (prev. 33.9 in December, and 31.6 in November), which bodes well for the jobless rate. Additionally, consumers' outlook for the labour market was also more upbeat, with the proportion expecting more jobs in the months ahead increased from 15.5 to 17.2, while those anticipating fewer jobs declined from 13.9 to 13.4. And regarding their short-term income prospects, there was a small decline in consumers expectations, from 22.7 to 22.0 percent, while the proportion expecting a decrease was virtually unchanged at 7.7.

JOB CUTS:

January Challenger job cuts jumped to 67,735, the highest monthly total since February 2019, and rising from 32,843 in the previous report. Challenger said that technology companies led in announced job cuts last month as they pivot to new products or services. But Tech was not the only industry embarking on this kind of restructuring. Companies across all industries are re-examining their hierarchies, particularly in Automotive and Retail, where innovations in technology are changing the landscape

ARGUING FOR A STRONGER REPORT:

  • Jobless claims. Initial jobless claims decreased in the five weeks between the payroll reference periods, averaging 218k (vs. 226k in the December payroll month). Continuing claims declined 20k from survey week to survey week, this likely understates the improvement given the winter seasonal bias: Goldman's model predicted a ~100k rebound in continuing claims this winter, even if underlying labor market conditions remain stable. Overall, jobless claims data remain consistent with a subdued pace of layoff activity.
  • Winter weather. Unseasonably dry weather in the Northeast and Ohio Valley likely boosted job growth in tomorrow’s report. While a population-weighted snowfall dataset was slightly above average over the survey week as a whole, this reflected snowstorms on Saturday that were probably too late to significantly affect the report (workers are counted as employed as long as they work at least one hour during the reference period). As shown in Exhibit 1, snowfall in the Northeast and Midwest was negligible (on average) from Monday to Friday of the survey week and was also quite modest in the prior week. Previous such instances coincided with strong or very strong January job growth (+355k in 2012, +195k in 2013, and +312k in 2019). While the impact is uncertain, a weather boost of 20k-30k in the January report is possible.
  • Labor market slack. With the labor market somewhat beyond full employment, the dwindling availability of workers is a factor weighing on job growth this year. However, as shown in Exhibit 2, first-print January job growth tends to be strong when the labor market is tight—for example in 1989, 1997-2000, 2006, and in two of the last three years. Labor supply constraints likely led firms to implement fewer end-of-year layoffs in these instances (anticipating a shortage of applicants in the coming year).
  • ADP. The payroll-processing firm ADP reported a 291k increase in January private employment, 134k above consensus and also 134k above the +157k average pace  of the previous three months. While the inputs to the ADP model argued for a solid reading, the strength was larger than expected, consistent with a solid underlying pace of employment growth and a strong reading tomorrow.

ARGUING FOR A WEAKER REPORT:

  • Employer surveys. Business activity surveys were firm on net in January, and while the employment components  exhibited similar patterns, with improvement in the manufacturing sector (tracker +0.9pt to 52.9) there was a slight decline in the much larger nonmanufacturing sector (tracker -0.3pt to 52.7, see composite in Exhibit 3). Service-sector job growth was +140k in December and averaged 164k over the last six months, while manufacturing payroll employment declined by 12k in December and has averaged +2k over the last six months.
  • Job cuts. Announced layoffs reported by Challenger, Gray & Christmas increased by 15k in January to 53k (SA by GS), and were 12k above their January 2019 level. The month-over-month rise was driven by increases in announced layoffs in the technology sector (+11k) industry