Why This Friday's Payrolls Report Could See A Big Miss

When the main economic event this week hits this Friday at 8:30 am EDT, when the BLS releases the May payrolls report, Wall Street consensus wil be expecting a 160,000 print, a number which will have a big impact on market expectations for a Fed rate hike at the June or July FOMC meeting. However, consensus may be disappointed for one reason: the Verizon strike could chop off as much as 35,000 workers from the headline payrolls print.

As DB's Joe LaVorgna explains, the May Nonfarm payrolls (+135k forecast vs. +160k previously) should show a substantial impact from 35k striking Verizon workers during the survey period. Private payrolls are likely to increase by only 125k (vs. 171k). This is one reason why the unemployment rate should remain steady at 5.0% for the third consecutive month. Average hourly earnings (+0.1% vs. +0.3%) could also be impacted by the Verizon workers as there is historical evidence that strikes of similar magnitude have distorted AHEs and hours worked.

Andrew Zatlin of Southbay Research, once called the "Moneyball of Economics", likewise lowered its NFP forecast by 20K to account for the Verizon strike:

On Friday (yesterday) the BLS released the Strike Report in which 35K Verizon strikers were identified. It can be found here: http://www.bls.gov/ces/cesstrk.htm

WHY INCLUDE NOW

 

The original SouthBay forecast did not include the Verizon strike because I was not sure if the BLS would include it.  That may sound strange given that the strike met all the criteria for being included in the payroll figures (for example, it lasted the entire period under coverage).  But one never knows with the BLS.  In any case, the official BLS Strike Report officially records it and that forces my hand.

 

NET IMPACT: (-20K) Payrolls

 

The Strike Report identifies 35K Verizon workers on strike but I estimate the payroll impact to be ~(-20K).

 

To manage the impact, Verizon undertook several steps.

 

First, they hired temps.  Second, they backfilled many of the positions with internal workers.  Third, some secondary support businesses benefited from the strike (like hotels & restaurants - many temporary workers had to be housed and fed).

 

I have direct experience with the Verizon issue

 

One of the major issues in the strike is that Verizon is overstaffed but unions are blocking corporate efforts to rationalize the redundancy.  I came across this exact issue many times while at Cisco Systems: modern telephony equipment gets more-and-more productive and requires fewer-and-fewer workers but unions prevent staffing re-alignment.  In the old days, telco equipment failures happened and linemen were dispatched to troubleshoot.  In today's world, the equipment fails less often and problems can be remotely diagnosed without having to send out a worker.

 

True or not, my experience with management at telcos is that they regard union workers as inefficient and less productive than non-union workers.  Sprint dealt with this issue in 2008 by selling their landline business to Centurylink: goodbye union workers.

 

A major reason the strike was less impactful is that a huge chunk are call-center employees.

 

With enough training, these jobs are relatively easy to backfill: the work is essentially reading from a book.  Most service problems follow the Pareto effect where 80% of the calls are easily fixed (either because they are user created or because the problem is well known and the fix is documented).  So Verizon took a lot of junior operations employees (finance, sales, etc) and deployed them into these jobs.

 

It means that Verizon was less exposed than one would expect if 35K workers walked off.

 

It also means that, in terms of net impact on payrolls, there will be a hit because they weren't 100% offset by new hires

All of the above likely means that in case Friday's NFP is a material miss to expectations, it will hardly be sufficient to derail any potential rate hike intentions as the miss will be "explained" by the now concluded Verizon strike.

* * *

Aside from payrolls, the holiday shortened week will be busy as DB's Jim Reid lays out:

With the public holiday in the US today and bank holiday in the UK it’s an unsurprisingly quiet start to the week although today in Europe we will get the May CPI report for Germany, confidence indicators for the Euro area and also Q1 GDP data out of France.

Tuesday is kicking off in Japan where we’ll get industrial production data along with the latest jobless rate data and various housing market indicators. In Europe we start in France with CPI and PPI reports, before we then get German unemployment data and the May CPI report for the Euro area (headline -0.1% yoy reading expected). Euro area money supply data and the unemployment rate will also be released. Over in the US on Tuesday it’s a busy afternoon of data. The April core and deflator PCE’s, personal spending and income data are all due. There will be more regional manufacturing data in the form of the Chicago and Dallas Fed reports, while the S&P/Case-Shiller house price index is also set to be released. Consumer confidence for May is also released in the afternoon.

It’s all eyes on China on Wednesday morning with the official manufacturing and non-manufacturing PMI’s for May due out, while in Japan the latest capital spending and company profits numbers are set to be released. In Europe on Wednesday we’ll get the final manufacturing PMI’s for May as well as a first look at those in the periphery, while in the UK mortgage approvals and money and credit aggregates are set to be released. In the US on Wednesday the big focus will be on the ISM manufacturing and new orders figures where the former is expected to decline 0.4pts to 50.4. Construction spending, the final manufacturing PMI revision, vehicles sales for May and the Fed’s Beige Book are also due out.

Thursday morning starts in Europe with the latest Euro area PPI data. That’s before the ECB meeting at midday while over in the US we’ll get the ADP employment change print, initial jobless claims and the ISM NY. We close the week on Friday in Asia with a wrap up of the non-official May PMI’s in China and Japan. The European session will also see the final revisions to the services and composite PMI’s (as well as first looks at the periphery) while Euro area retail sales is also due out.

Over in the US on Friday afternoon the big focus will be on the May employment report including nonfarm payrolls. As well as that we’ll also get the final revisions to durable and capital goods orders, factory orders and the ISM services print (expected to nudge down 0.3pts to 55.4).

* * *

Finally, here is the full breakdown of just key US events, with consensus and firm estimates from Goldman Sachs:

Monday, May 30

  • Memorial Day. There are no data releases and all markets are closed.

Tuesday, May 31

  • 8:30 AM Personal income, April (GS +0.5%, consensus +0.4%, last +0.4%)
  • Personal spending, April (GS +0.9%, consensus +0.7%, +0.1%)
  • PCE price index, April (GS +0.3%, consensus +0.3%, last +0.1%)
  • Core PCE price index, April (GS +0.18%, consensus +0.2%, last +0.1%)
  • PCE price index (yoy), April (GS +1.1%, consensus +1.1%, last +0.8%)
  • Core PCE price index (yoy), April (GS +1.6%, consensus +1.6%, last +1.6%)

We expect personal income to rise by 0.5% in April. Wage growth has picked up in both the March and April payroll reports. Payroll growth softened, but this is likely due to payback from weather-related gains in earlier months. We expect core PCE prices to edge up by 0.18% in April following a 0.19% gain in the April core CPI. The core PCE price index likely rose by 1.6% over the past year.

  • 09:00 AM S&P/Case-Shiller home price index, March (GS +1.0%, consensus +0.8%, last +0.7%)

The Case-Shiller home price index appears to have been influenced by seasonal adjustment challenges recently. We expect a +1.0% gain in house prices in the March report based on the pattern seen last year. Over the past year, the 20-city index has increased 5.0%.

  • 09:45 AM Chicago PMI, May (GS 50.0, consensus 50.6, last 50.4)

We expect the Chicago PMI to remain roughly unchanged at 50.0, the breakeven level. The series has been a bit volatile of late, showing sizable swings between expansion and contraction reads.

  • 10:00 AM Conference Board consumer confidence, May (GS 95.0, consensus 96.3, last 94.2)

We expect consumer confidence to edge up in May. The University of Michigan’s final estimate of consumer sentiment for May moved down last week, although it remains at its highest level since mid-2015.

  • 10:30 AM Dallas Fed manufacturing index, May (consensus -8, last -13.9)


Wednesday, June 1

  • 09:45 AM Markit Flash US Manufacturing PMI, May final (consensus 50.5, last 50.5)

The Empire State weakened in May, in line with the other manufacturing surveys pointing toward a softening in manufacturing activity. We find that the flash Markit PMI does contain some predictive power for the ISM.

  • 10:00 AM ISM manufacturing, May (GS 49.8, consensus 50.5, last 50.8)

Manufacturing surveys were weak across the board in May, pointing to a broader softening in domestic manufacturing activity. The Empire State survey declined sharply (-18.6pt to -9.0), and the Richmond Fed survey contracted (-15.0pt to -1.0). The Kansas City Fed (to -5 from -4) and the Philly Fed (-0.2pt to -1.8) surveys moved down as well. On net, our manufacturing survey tracker—which is scaled to the ISM index—edged down 2.4pt to 49.3.

  • 10:00 AM Construction spending, April (GS +0.5%, consensus +0.5%, last +0.3%)

We expect construction spending to rebound after a softer-than-expected report last month.

  • 02:00 PM Beige Book, June FOMC meeting period

The Fed's Beige Book is a summary of regional economic anecdotes from the 12 Federal Reserve districts. The April Beige Book reported continued expansion at a modest pace, continued strengthening of the labor market, signs of a pick-up in wages, and notably reported a rebound in manufacturing activity. In the June Beige Book, we will look for additional anecdotes related to wage growth, continued improvement in manufacturing, and the state of the domestic energy and manufacturing sectors.

  • 4:00 PM Total vehicle sales, May (GS 17.4mn, consensus 17.3mn, last 17.3mn); Domestic vehicle sales, May (GS 13.9mn, consensus 13.5mn, last 13.5mn)

Our auto analysts expect total vehicle sales to accelerate slightly from April.

Thursday, June 2

  • 08:15 AM ADP, May (GS +173k, consensus +180k, last +156k)

Based on our understanding of how ADP filters its own proprietary data with other publicly available information, we expect a 173k gain in ADP payroll employment in May.

  • 08:30 AM Initial jobless claims, week ended May 28 (consensus 270k, last 268k);Continuing jobless claims, week ended May 21 (consensus 2,157k, last 2,163k)

Consensus expects initial jobless claims to remain roughly in line with the previous week. We continue to read the trend in claims as consistent with low layoff activity nationally.

Friday, June 3

  • 03:45 AM Chicago Fed President Evans (FOMC non-voter) speaks

Federal Reserve Bank of Chicago President Charles Evans will be discussing the economy in London. Q&A is expected. Recently, President Evans remarked that inflation data are likely to heavily inform the Fed’s decision to raise interest rates.

  • 8:30 AM Nonfarm payroll employment, May (GS +165k, consensus +160k, last +160k)
  • Private payroll employment, May (GS +155k, consensus +154k, last +171k)
  • Average hourly earnings (mom), May (GS +0.2%, consensus +0.2%, last +0.3%)
  • Average hourly earnings (yoy), May (GS +2.4%, consensus +2.5%, last +2.5%)
  • Unemployment rate, May (GS 4.9%, consensus 4.9%, last 5.0%)

Economic data have been mixed this month. Regional Fed manufacturing and service sector surveys were weaker on net while initial jobless claims remained near post-crisis lows and measures of consumer confidence improved. We anticipate a May payroll gain of 165k after a 160k read in April, accounting for the Verizon strike of 35,100 workers that occurred during the survey period. We expect the unemployment rate to edge down to 4.9%, and average hourly earnings to rise at a pace of +0.3%.

  • 08:30 AM Trade balance, April (GS -$40.9bn, consensus -$41.0bn, last -$40.4bn)

The new advanced goods trade report showed a slightly wider goods deficit in April (-$57.5bn from -$57.1bn), reflecting a rebound in both exports and imports. We expect the services balance to be little changed in April. Overall, we expect the total trade deficit to be -$40.9bn.

  • 9:45 AM Markit Flash US Services PMI, May final (consensus 51.4, last 51.2)
  • 10:00 AM ISM non-manufacturing, May (GS 54.8, consensus 55.5, last 55.7)

Service sector surveys were mostly weaker in March. The Philly Fed (-8.9pt to +4.6) and the Richmond Fed (-4pt to +11) both declined while the New York Fed (+2.9pt to +5.4) survey rose (the New York survey is a relatively new and not seasonally adjusted series). The Markit Services PMI also declined (-1.6pt to 51.2), escaping contractionary levels. The ISM non-manufacturing index rose by 1.2pt last month.

  • 10:00 AM Factory orders, April (GS +2.6, consensus +0.5%, last +1.1%)

Factory orders likely accelerated in April, after a better-than-expected durable goods report.