Your Last Minute Payrolls Preview: What Wall Street Expects

In less than an hour, the BLS will report the latest, May, non-farm payrolls and unemployment data. Here is what consensus expects:

  • US Change in Nonfarm Payrolls (May) M/M Exp. 160K (Low 90K, High 215K, Prey. 160K, March. 208K)
    • US Unemployment Rate (May) M/M Exp. 4.9% (Low 4.9%, High 5.1%, Prey. 5.0%, March. 5.0%)
  • US Average Hourly Earnings (May) M/M Exp. 0.2% (Low 0.1%, High 0.4%, Prey. 0.3%, March. 0.2%)

The NFP breakdown by bank is as follows:

  • BNP 110K
  • Deutsche Bank 135K
  • Citigroup 140K
  • SocGen 140K
  • Morgan Stanley 140K
  • Jefferies 155K
  • Nomura 160K
  • Goldman Sachs 165K
  • Deutsche Bank 170K
  • Raymond James 175K
  • Scotiabank 185K
  • Lloyds 195K

As RanSquawk notes, the NFP report at 8:30 am will be under intense scrutiny as it is the final jobs report before the June rate decision by the FOMC. The market has increased the probability of a hike at the June meeting significantly in recent weeks and a strong labour market has always been a key pillar on which Fed members say they would begin normalization. Of note, FFR futures currently price in a 22% chance of a hike in June.

Expectations are for a reading of 160K and although this is below the speculative benchmark of 200k, as we approach full employment the number of jobs the economy is able to create per month is diminished. That represents a marked slowdown from last year’s average monthly growth of 229,000 jobs.

One also has to consider that this reading will be reduced by 35,000 as a result of striking Verizon workers, who will be classified by the Bureau of Labor Statistics as unemployed for the month of May.

Indeed, as reporeted earlier this week, a strike involving workers at Verizon Communications Inc. workers probably depressed payrolls last month. Economists and policy makers alike will nonetheless try to dissect the data for signs that underlying labor-market momentum remains in place.

“Overall the U.S. economy has regained some momentum at the beginning of the second quarter and that should also be visible in the labor-market data -- the reason we don’t see it in the payroll data is the Verizon strike” said Harm Bandholz, chief U.S. economist at UniCredit Bank AG in New York. “Net of the Verizon strike, payroll gains would have accelerated in May.” Bandholz forecasts a 160,000 increase in hiring.

Another factor that may have held back last month’s figures is “supply problems stemming from the recent Japanese earthquake,” which “will hit auto-sector employment too,” Paul Ashworth, chief U.S. economist at Capital Economics NA Ltd., wrote in a May 26 note to clients. Ashworth’s 120,000 forecast for payrolls is among the lowest in the Bloomberg survey.

All in all, many expect this to be a somewhat disconsolate reading, especially against a back drop of such strong labour gains, with the average reading for last year at 240k.

The labor force participation rate likely declined to 62.8 percent that month, down from a two-year high of 63 percent in March. “The key thing going forward is going to be the labor force participation rate,” said Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. “If we don’t get an increase in that just a little bit here and there, we’re going to bump up into labor-supply constraints much more quickly than some economists are anticipating. If there’s a lack of labor supply, job growth will weaken more quickly.”

Just as important as the headline number will be data on average wages. The impact of the Verizon strike may also extend to figures on average hourly earnings and average weekly hours. Within the affected sectors -- electrical contractors and wired telecommunications carriers,  estimates would be affected “only if the hours or earnings of the people on strike or layoff differ considerably from the industry’s average,” according to the Labor Department.  Average hourly earnings are expected to have climbed 0.2 percent in May from the month before and 2.5 percent from a year earlier.

Economists remain optimistic that wage growth, the missing link of the recovery so far, will pick up as the labor market continues to tighten. As the economy approaches full employment, "you tend to get a little bit of wage pressure with a slowdown in hours worked," said James Sweeney, chief economist at Credit Suisse Securities USA LLC in New York.

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This is the final NFP report before the Fed meet on June 15th and expectations for a hike, although somewhat diminished the last week or so, peaked at 34% last Tuesday/Wednesday. This is the first meeting this year where there has been a material chance of a hike and given the reports proximity to the meeting, there is in many respects, a greater chance for volatility in markets surrounding the report, given the potential wider repercussions.

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Here is Goldman's full preview:

We forecast that nonfarm payroll employment increased by 165,000 in May, roughly in line with the gain of 160,000 in April. Payroll growth should be held back by a strike at Verizon Communications, which BLS figures suggest idled 35,100 workers. Excluding the effect of the Verizon strike our forecast implies a gain of 200,000—equal to the average increase over the preceding three months.


Arguing for a stronger report:

  • Weather: In April, employment in the three sectors that we find are most sensitive to weather-related swings—construction, retail, and leisure and hospitality—increased by just 20,000 combined, a deceleration of 88,000 compared to the average monthly growth rate over the prior three months. Similarly, our model-based estimates suggest changes in the weather (specifically, a return to seasonal norms after unusually warm winter months) subtracted about 70,000 from employment growth last month; the estimates from economist Jonathan Wright point to a weather-related drag of about 80,000 in April (Exhibit 1). A smaller drag from weather-related changes should therefore boost payroll growth in May compared to April.
  • Job cuts: According to the Challenger, Gray & Christmas report, announced job cuts fell to a five-month low in May. Layoffs in the energy and retail sectors both fell from elevated levels in April.


Arguing for a weaker report:

  • Verizon strike: According to the BLS Strike Report, the ongoing strike at Verizon Communications idled 35,100 workers during the payroll survey reference week (the BLS notes that this estimate could differ from the final total). The strike will affect two line items in the payroll report: specialty trade contractors (a component of the broader construction category) and telecommunications (a component of the information services category). Based on the Verizon strike in August 2011—which also affected employment in these industry groups (as well as others)—most of the impact should show up in the information services category. The strike could lift employment in temporary help services, but our equity analysts expect these offsetting effects to be relatively small.
  • Online job ads: The Conference Board’s Help Wanted Online (HWOL) report showed a sharp contraction in online job posting in May, and this measure has now declined in three of the last four months. Adjusting for technical factors that reportedly affected this data series around the turn of the year, the HWOL index has now declined by about 9% since its January peak.
  • Job availability: The Conference Board’s labor differential—the difference between the share of consumers saying jobs are plentiful vs. hard to get—declined to -0.1 in May from +1.4 in April. The index has remained about unchanged for the last nine months.
  • ADP: The payroll processing firm ADP reported a 173,000 gain in private employment in May, up from a revised 166,000 gain in April. The May employment figure was not affected by the Verizon strike. Thus, taken at face value, the ADP figures imply private employment growth of about 140,000 once idled Verizon workers are taken into account.

Neutral factors:

  • Jobless claims: Initial claims for unemployment insurance benefits increased sharply in early May, and remained somewhat elevated into the payroll survey week. However, the increase this month can be pinned on a few special factors. In particular, initial claims in New York State often increase each spring due to faulty seasonal adjustment, and temporary plant shutdowns in the auto sector appear to have lifted claims in a handful manufacturing states (Exhibit 2). Besides these swings, initial claims have looked reasonably steady in recent months.
  • Manufacturing surveys: The employment components of the manufacturing surveys were mixed in May. The employment measure in the national ISM survey was unchanged at 49.2, indicating a mild contraction in manufacturing jobs. The alternative Markit PMI employment index edged up by 0.8pt to 48.3, but also remained below the 50 breakeven level. Among the regional surveys, the Empire State and Philadelphia Fed indexes both improved but remained at low levels (+2.1 and -3.3, respectively). The remaining three Fed District manufacturing surveys (Dallas, Kansas City, and Richmond) showed a deterioration in hiring activity month-over-month.
  • Service sector surveys: The ISM nonmanufacturing survey will not be released until after tomorrow’s employment report. The other service sector surveys available for May suggest the rebound in the ISM’s employment component last month could prove short-lived. The employment indexes from Markit, the New York Fed, and the Dallas Fed each declined on the month. Only the Richmond Fed survey showed accelerating employment growth last month.

We expect the unemployment rate to decline to 4.9% from an unrounded 4.98% in April, but see the risks as tilted slightly to the upside. The headline U3 rate was unchanged in April, and the broader U6 underemployment declined 0.1pp to 9.7%. The household survey was soft last month, showing a 316k decline in employment. Because the jobs decline was matched by a similar drop in the labor force, the unemployment rate was unchanged. We are looking for a rebound in the household measure of employment, which we anticipate will modestly lower the unemployment rate. If the labor force participation rate rebounds, however, the unemployment rate could hold steady. More broadly, while the labor force participation rate is probably still slightly below its structural rate, cyclical weakness has diminished substantially over time. The participation rate may well rise a bit further, but the room for further non-inflationary gains is probably limited.

Average hourly earnings for all workers are likely to rise 0.2% (mom) in May, following a 0.3% gain in April. We have found that calendar effects are important for month-to-month changes in average hourly earnings, and these effects point to a trend-like increase for last month. A 0.2% increase would result in a 0.1pp decline in the year-on-year rate to 2.4%. Looking further ahead, we expect wages to continue to accelerate as the labor market tightens and state minimum wage hikes provide an added boost.

Market Reaction:

Given the somewhat downbeat expectations for the headline reading, anything well below the expected will cause the usual Algo/fast money moves. However, it would have to be a seriously weak reading in order to take June completely off the table, especially as the Fed have made such an effort in recent weeks of informing the market that June is most definitely a 'live' meeting. Ergo, the potential downside may not be enough to slow the USD index's steady grind higher as we head towards June 15th. As ever a beat on the headline reading would cause an initial bout of USD strength and play into the overall backdrop, where USD bulls are still at the fore.