The October Payrolls Report: What Wall Street Expects

While the October payrolls report, due out at 8:30am on Friday, has taken on a secondary importance in light of the market's near certainty that the Fed will hike rates in December (absent a Trump victory and/or a market crash), analysts and traders will surely be concerned any prominent outlier prints that deviate too far from the consensus estimate of 175K. So, in preview of tomorrow's biggest economic update, here is a snapshot of what Wall Street expects.

According to consensus, while estimates point to a pick up in payrolls growth for October, but jobless claims and ADP report have sent mixed signals ahead of NFP release; still, the number should be strong enough to prompt the Fed to raise rates in December, strategists say. 

  • The average Nonfarm payrolls estimate stands at 175k, up modestly from September’s +156k
  • The Unemployment rate seen at 4.9% vs 5.0%
  • Average weekly hours exp. at 34.4
  • Average hourly earnings exp. +0.3% m/m, vs +0.2% in September

This is what the latest ADP report said:

“Job growth remains strong although the pace of growth appears to be slowing,” Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, said in a statement. Moody’s produces the figures with ADP. “Behind the slowdown is businesses’ difficulty filling open positions. However, there is some weakness in construction, education and mining.”

The Nov. 2, FOMC statement was optimistic:

“The labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. Although the unemployment rate is little changed in recent months, job gains have been solid”

Summary Analyst Views:

Deutsche Bank (Joe Lavorgna)

  • Headline and private payrolls are expected to rise 150k, slowing moderately from their three-month trailing averages of 192k and 177k, respectively
  • A similar reading to the ADP report for today's employment report from the BLS will certainly keep the Fed on track to hike in December.
  • "The October employment report should strengthen the Fed's resolve to raise rates next month.... the bar is fairly low with respect to what the Fed needs to see from the October labor data."

FTN (Jim Vogel, in note)

  • Current market expectations are in line with December rate hike; only a figure of 125k or less could push market-implied Fed hike odds below 65%
  • Payrolls of 150-200k would see UST 5Y yield between 1.27-1.32%, UST 10Y yield between 1.79-1.84%

Barclays (Michael Gapen, in note)

  • Recent data on jobless claims “supportive of further improvement in labor market conditions this year”
  • “However, over the past few months, the relationship between claims and employment seems to have weakened somewhat and we have chosen to take less signal from the ongoing declines than we have in the past”

BMO (Ian Lyngen, in note)

  • ADP miss suggests “marginal downward skew” in NFP report
  • Notes relevant correlation between the two measures that has held up 9 times in last 12 months

Morgan Stanley (Ted Wieseman, in note)

  • Lowers payrolls forecast to 185k from 205k
  • ADP miss points to weakness ahead of NFP report; overall figure of +147k was “far enough below” MS estimate of 197k to prompt a downward adjustment to payrolls prediction

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One notable point brought up by Joe Lavorgna, and the reason why going forward, he is "less sanguine on the labor market." is that as the chart below indicates, "the year-over-year change in temporary hiring leads that of the overall labor market by two quarters. Temp hiring has been trending noticeably lower as of late. If temp hiring began declining outright on an annual basis, the risk of a more concerning slowdown in hiring would increase."

* * *

According to Southbay Research, today's Challenger Layoffs, and seasonal retail hiring holds the key to the October Payrolls report, as retailers are scrambling for workers.

Retail stores Are Hiring Earlier

Thanks to Amazon, big box stores continue to cut store fronts.
This year brought another wave of big-box store closings (Walmart, JC Penny, Macy's, etc).  On top of that is the bankruptcy of Sports Authority.

No drop in hiring despite fewer store fronts

With hundreds of fewer brick-and-mortar stores, we should expect fewer retail seasonal workers.
In fact, the opposite is the case: (per Challenger Gray) announced seasonal retail hiring will slightly exceed last year's.  The reason: more online shopping is driving more logistical/inventory/shipping support.

Early Hiring?

Seasonal hiring kicks off in October: last year 194K people were hired (not seasonally adjusted).
More importantly, the trend over the last few years is towards earlier October hiring.
Is that the case this year?

Per Challenger Gray, October job cut announcements were (-1K), much lower than last year's (-5K).
That could be a sign that retailers are staffing up early.

One possible driver: Halloween spending. 

Per the National Retail Federation, spending this year was up 10% over last year.

* * *

Finally, here is Goldman's comprehensive preview of what to expect:

Payrolls Preview

We forecast an increase of 185k in nonfarm payroll employment for October, slightly above consensus expectations. An expected rebound in employment growth for state and local governments, as well as education- and health care-related industries, is a key reason for the acceleration from a 156k gain in payrolls in September.

We look for a decline in the unemployment rate to 4.9%, which is now unusually high compared with continuing jobless claims. Favorable calendar effects as well as strengthening underlying wage tends likely boosted average hourly earnings by 0.3% month-over-month.

We forecast that nonfarm payroll employment increased by 185k in October, slightly more than expected by consensus estimates (+175k). Although payroll growth edged down to 156k in September, much of the slowing was concentrated in state and local government employment and (private) education and health care employment. In September these industries added just 14k jobs, compared with an average monthly increase over the prior twelve months of 61k (Exhibit 1). A partial rebound in these sectors—with other industries steady—would be enough to lift payroll growth into the high-100k range.

Expecting a Rebound in Government, Education and Health Employment


Arguing for a stronger report:

  • Jobless claims: Initial claims for unemployment insurance benefits have continued to trend down, with the four-week moving average falling to 252k in the October survey week from 258k in the September survey week. The decline would have been even larger except for a rise in claims in the Southeast due to Hurricane Matthew (see below) and an unusually large increase in claims in Kentucky (which we believe was related to a temporary auto plant shutdown). In general, the level of initial claims looks consistent with very low layoff activity in the economy.
  • Manufacturing surveys: The majority of the employment components of the various monthly manufacturing surveys improved in October. The ISM manufacturing (+3.2pt to 52.9), Philly Fed (+1.3pt to -4.0), Kansas City Fed (+10 to +7), and Richmond Fed (+16pt to +3) measures all rose, while the Dallas Fed employment index declined (-2.1pt to +0.2). Manufacturing employment fell by 13k in September, and has declined by 5k on average over the last six months.
  • Seasonals: Seasonal factors are mildly positive for payroll growth this month, in our view. Since the 2008-9 recession, October payroll growth has surprised consensus expectations to the upside two-thirds of the time, with an average surprise of 45k. Moreover, October has often featured favorable revisions: the average two-month revision in the October employment report has been 67k since 2010, 37k since 2005, and 42k since 2000 (Exhibit 2).

October Employment Reports Often Feature Upward Revisions


Arguing for a weaker report:

  • Job availability: The Conference Board’s labor differential—the difference between the share of households saying that jobs are plentiful and the share saying they are hard to get—declined 3.1 points to +2.2. Despite the pullback, the labor differential remains near a post-crisis high.
  • ADP: ADP reported a 147k gain in private payroll employment in October, below a revised +202k increase in September. The ADP report introduced methodological changes this month, and will now offer more details by sector. Our preliminary analysis suggests that the forecast performance of the ADP series should be similar under the new methodology.
  • Hurricane Matthew: Hurricane Matthew struck the Southeastern US in early October, and may have weighed on payroll employment growth in some states. Initial jobless claims in the region were cumulatively about 10k above their pre-hurricane trend during the middle weeks of last month (with most of the effects in North Carolina). We therefore expect a modest drag from the hurricane of 5-10k on October payroll employment growth (see here for more details).

Neutral factors:

  • Service sector surveys: The employment components of some service sector surveys deteriorated in October, but most appear consistent with healthy payroll gains. In particular, the ISM non-manufacturing report’s employment index declined to 53.1 following a record monthly increase to 57.2 in September. Aside from the September value, however, the index is at its highest level of this year. Among the regional surveys, the NY Fed index rose slightly (+1.6pt to +9.7, not seasonally adjusted) and the Richmond Fed measure was unchanged (at +6), although the Philly Fed index (-10.8pt to +8.5) and Dallas Fed index (-1.7pt to +2.7) declined. Service sector employment rose 157k last month, and has increased 163k on average over the last six months.
  • Job cuts: Announced layoffs reported by Challenger, Gray & Christmas were little changed at 31k for October. Announced job cuts have remained within a narrow range over the last six months and, like initial jobless claims, appear consistent with generally low layoff activity.

We expect that the unemployment rate declined to 4.9% in October from an unrounded 4.965% previously. On a rounded basis, the headline U3 unemployment rate edged up by one-tenth in September, and is now up three-tenths from a cyclical low of 4.7% in May. A further increase in the U3 unemployment rate would be surprising in light of the continued decline in the number of unemployment insurance benefit recipients (Exhibit 3). The U3 and U6 measures of labor utilization may take on heightened importance this month, given Fed officials’ focus on the degree of slack remaining in the labor market.

Unemployment Rate High Compared to Continuing Claims

We forecast that average hourly earnings for all workers rose by 0.3% (mom) in October, in large part reflecting favorable calendar effects. We expect the year-on-year rate to remain at 2.6%. The broader wage data remain encouraging: our wage tracker—which aggregates four measures of wage growth—also stands at 2.6% year-on-year, a sign that diminishing slack is boosting wage growth.