After the abysmal March labor report, all we - and the Fed - can say is that April better be good, or else Yellen's claim of "transitory weakness" will simply be the latest nail in the coffin of Fed credibility. Here is the consensus for the key numbers the BLS will report at 8:30am ET on Friday morning.
- March Nonfarm Payrolls Exp. 185K, (Prey. 98K, Feb. 235K) US Unemployment Rate (Mar) M/M Exp. 4.6% (Prey. 4.5%, Feb. 4.7%)
- Average Hourly Earnings Exp. 0.30% (Prey. 0.20%, Feb. 0.20%)
Payrolls Expectation by Bank:
- Barclays: +225K,
- Bank of America: +170K,
- Goldman Sachs: +200K,
- SocGen: 165K,
- UBS: +210K,
- Wells Fargo:+178K,
Big Picture: Friday’s non-farm payrolls release follows Wednesday’s FOMC meeting where the Fed, as expected, kept rates on hold with all eyes now on June’s decision. One key takeaway from this week’s decision was the Fed noting the labour market conditions continuing to strengthen as growth slowed, as it deemed that job gains had been solid despite March’s softer than expected labor market report and quasi-recessionary Q1 GDP. The Fed’s statement was devoid of any real negatives and has led to Fed Fund futures pricing in a near 80% chance of a 25bps hike at its June meeting.
As RanSquawk notes, the expectation for a headline print of 185K points to a solid bounce-back from last month’s 98K, with the possibility of an upward revision to last month’s release as many analysts have attributed the weakness to negative payback following a late Easter holiday and an unusually warm winter in the US. However, the unemployment rate is expected to tick up to 4.6% from 4.5%, with many suggesting that last month’s fall was a result of sampling noise.
Goldman is even more optimistic than the consensus, and estimates payrolls increased by 200k in April, a sharp acceleration from March’s +98k pace and above the three-month moving average of +178k. It sees labor market fundamentals remaining encouraging on the whole, as April exhibited a further decline in initial jobless claims, improvement in regional service sector employment surveys, and an elevated labor market differential reported by the Conference Board. Continuing claims also fell sharply from survey week to survey week, dropping at their fastest pace in two years (-64k). Additionally, Goldman believes a favorable swing in the weather –reflecting mainly the timing of Winter Storm Stella during the March survey week – is likely to boost April job growth by roughly 25-40k relative to trend.
On the negative side, the bank believes the trend in retail employment growth is now slowing, reflecting the weaker brick-and-mortar sales trends and a continued shift towards less labor-intensive e-commerce firms. We also expect minor drags on job growth from the tail end of the federal hiring freeze and from a telecom strike that continued into the survey week (a -2k impact).
We estimate the unemployment rate remained stable at 4.5% in April following the one tenth drop in March (to 4.496% unrounded). The pace of employment growth picked up sharply in the household survey to start the year, with 1.4 million cumulative jobs added over the past three months (adjusted for the impact of the January population controls). Offsetting this improvement, the participation rate also moved higher, rising three tenths over the same period to 63.0%. While the risks to our unemployment rate forecast are likely skewed to the upside (given the possibility of mean-reversion), our base case expectation is that the rate continues to round to 4.5%.
Finally, we expect average hourly earnings to increase 0.3% month over month and 2.7% year over year, reflecting the interaction of firming wage growth with positive calendar effects. The April payroll period ended on the 15th, which in our model, is associated with above-average wage growth. Additionally, we believe the acceleration in the employment cost index to a cycle-high pace in Q1 provides additional evidence of firming underlying wage growth.
Recent Data: Wednesday’s ADP employment report showed another sign of steady growth, coming in at 177K vs. the expected 175K. Despite last month’s lack of correlation, the private employment figures tend to give an indication of the headline figure when viewed over a longer horizon. April’s soft data (The Markit and ISM PMIs) point to a slowing in hiring, although all the surveys’ employment sub-indices remained in expansionary territory, with all the headline releases strong.
Factors arguing for a stronger report (per Goldman):
Weather rebound. We believe the winter storms in early March likely exerted a meaningful drag on payroll growth in the last report, as Winter Storm Stella hit the Midwest and East Coast at the beginning of the March survey week. The level of population-weighted snowfall during a March survey week was at its highest since at least 2005, and similarly, the month-to-month drop in April survey week snowfall is also the largest over that period. Accordingly, we expect April payrolls growth to benefit, as swings of this magnitude have historically been associated with meaningful acceleration in weather-sensitive payroll categories, such as construction, retail, and leisure and hospitality (Exhibit 1).
Exhibit 1: Weather Likely Shifting from a Drag on March Payroll Growth to a Boost in April
Source: National Centers for Environmental Information, National Oceanic and Atmospheric Administration, Bureau of Labor Statistics, Goldman Sachs Global Investment Research
Regional granularity also suggests a meaningful drag from weather in the March employment report. Overall payroll growth in New England, Mid-Atlantic, and East North Central regions swung from +102k in February to -52k in March (compared to a 2016 average pace of +47k), likely reflecting unusually snowy March weather and some payback from the relatively warm February. Weather-sensitive industries in the regions contributed the majority of the March deceleration. One additional consideration is that the effects of Winter Storm Stella appear to have lingered throughout the March survey week in many populated areas. As a point of comparison, the snow produced by the January storms in the South – which did not appear to materially affect payrolls – had largely melted away by the Tuesday of that survey week. This suggests scope for the April employment report to benefit from workers in the establishment survey returning to their jobs. Taken together, our base case expectations assume that weather will boost April payrolls growth relative to the underlying trend by between 25k and 40k.
Jobless claims. Initial claims for unemployment insurance benefits declined, averaging 243k during the four weeks between the March and April payroll survey periods, a new cycle low. Additionally, continuing claims dropped by 65k from survey week to survey week, their largest decline over such a period since April 2015.
Service sector surveys. Despite declines in some of the service-sector employment surveys, our overall non-manufacturing employment tracker improved in April (to 54.5 from 53.7), and all of its components remained in expansionary territory. The ISM non-manufacturing (-0.2pt to 51.4), New York Fed (-5.2pt to +8.5, SA by GS), Dallas Fed (-3.6pt to +4.5), and Markit PMI Services employment components softened. However, this was more than offset by a sharp rise in the Philly Fed subindex (+9.2pt to +26.4) and further improvement in the Richmond Fed employment component (+4pt to +21). The key labor market subcomponent of the Consumer Confidence report also remained strong, edging down by 1.1 from the cycle-high reading in March to 11.7. Service sector payroll employment grew 61k in March and has increased 121k on average over the last six months.
Job cuts. Announced layoffs reported by Challenger, Gray & Christmas after our seasonal adjustment fell by 15k to 31k in April, a six-month low.
Arguing for a weaker report:
Continued retail weakness. Retail employment growth has fallen from its historical trend of 15-20k per month to -5k on average over the past six months. While some of the March weakness was likely weather-related, we expect the structural shift of retail sales from brick and mortar stores toward less labor-intensive e-commerce firms will continue to weigh on payroll growth in that industry, with the impact on the order of 10k per month relative to its previous trend. This drag on retail employment has appeared particularly pronounced recently – with a 61k cumulative drop in retail payrolls over the last two months – and we note the possibility that weak brick and mortar sales trends in Q1 may be accelerating the pace of this structural shift.
Exhibit 2: Shift Towards Online Retail Could Reduce Overall Job Growth by Roughly 10k per Month
Source: Bureau of Labor Statistics, Goldman Sachs Global Investment Research
Federal hiring freeze. The administration’s hiring freeze for federal workers (excluding defense and public safety) went into effect on January 23 and concluded on April 11 – the Tuesday of the April survey week. So far, its impact appears quite limited, with federal payrolls down negligibly in February and March (mom sa). As shown in Exhibit 3, the impact also seems minor in the context of federal job growth during the 1981 federal hiring freeze at the start of the Reagan administration (Exhibit 3). Thus far, government departments may have been able to offset the hiring freeze through reduced attrition or increased contracted hiring. Accordingly, we expect a minimal drag from the final month of the freeze and are assuming a flat reading for total government payrolls in tomorrow’s report.
Exhibit 3: Federal Hiring Freeze Exerting Minimal Impact on Payrolls So Far
Source: Bureau of Labor Statistics, Goldman Sachs Global Investment Research
Telecom strike. The April employment report coincided with a strike of 2k workers in the wired telecom subindustry, which is set to reduce payroll growth in the information sector by 2k this month.
Manufacturing sector surveys. Employment components of manufacturing sector surveys were mixed in April but all remained in expansion territory. The ISM manufacturing employment component fell 6.9 points to 52.0 after reaching its highest level since mid-2011 in the March report. The Richmond Fed (-15pt to +5) and Kansas City Fed (-4pt to +9) employment subindices also declined. In contrast, the Empire State (+5.1 to +13.9), Philly Fed (+2.4pt to +19.9), Dallas Fed (+0.1pt to +8.5) and Chicago PMI employment components all improved. Manufacturing payroll employment rose 11k in April, its fourth consecutive increase, and has increased 10k on average over the last six months.
ADP. The payroll processing firm ADP reported a 177k increase in private payroll employment in April – about as expected – suggesting a stable underlying pace of job growth. The ADP measure overshot considerably to the upside relative to BLS private payroll growth in March (+255k vs. +89k), making the task of teasing out the underlying signal from the report more difficult. We believe the 177k pace of private job gains was encouraging on the whole, and we also expect the rebound from Winter Storm Stella to show up more visibly in Friday’s employment report.
Job availability. The Conference Board’s Help Wanted Online (HWOL) report showed a modest decrease in April online job postings (-1%) following February’s uptick (+2%). However, we continue to place limited weight on this indicator at the moment, in light of research by Fed economists that suggests the HWOL ad count has been depressed by higher prices for online job ads.
Some other observations:
Fed Impact: The impact on the Fed’s thinking could be slightly more in focus following last month’s headline 98K. Despite the employment growth average still sitting well above the Fed’s threshold for moving towards full employment, another big miss could begin to throw up some questions for the central bank. At present the rate path and the Fed’s message remain clear, and as a result it would seemingly take a string of poor labour market reports to derail the Fed’s plans to deliver two more 25bps hikes this year.
There are also wider factors in play within the Fed’s thought process, such as an inflated stock market, its large balance sheet and the Trump administration’s proposed fiscal stimulus.
Market Reaction: As ever, fast money moves will surround the initial headline. A stronger than expected number historically sends the USD higher and Treasuries lower with the opposite tending to be the case for a weaker number, before markets digest some of the other details of the report.