February Payrolls Preview: Watch The "Hours Worked"

With the February jobs report due at 830am ET on Friday morning, here is a recap of Wall Street expectations.

While recent macro economic data has been solid, and suggests a strong number, remember: nobody cares  about the actual payrolls number any more, after all the US is about to have sub-4% unemployment with over 95 million Americans not in the labor force. The only thing that matters is what is the average hourly earnings, and whether in February the BLS can pull off the same trick it did last month when it was hours worked that dropped, giving the market the impression that hourly pay had risen when actually just the denominator shrank.

And even if actual wages don't rise, and they probably won't, the other thing to remember is that wages aren't actually important - so ignore all you read above - what is important is the "intention" to raise wages, something company CEOs have learned very well.

Below is a quick summary of Wall Street expectations via RanSquawk  and Goldman.

PREVIEW: Non-farm Payrolls (Feb 2018)

  • Non-farm Payrolls: (EXP +205k, PREV +200k)
    • Private Payrolls: (EXP +191k, PREV +196k)
    • Manufacturing Payrolls: (EXP +15k, PREV +15k)
    • Government Payrolls: (PREV +4k)
    • Unemployment Rate: (EXP 4.00%, PREV 4.10%)
  • Average Earnings Y/Y: (EXP +2.8%, PREV +2.9%)
  • Average Earnings M/M: (EXP +0.20%, PREV +0.30%)
  • Average Work Week Hours: (EXP 34.4hrs, PREV 34.3hrs)
  • U6 Unemployment Rate: (PREV 8.20%)
  • Labour Force Participation: (PREV 62.70%)

PAYROLL TRENDS: Trend rates remain firm. Payroll growth has averaged 176k/month over the last 12-months, 180k/month over the six-months, and 192k/month over the last three-months, and the consensus view expects 205k in February.

PAYROLL GROWTH: ADP reported another solid increase in February (235K vs expected 193K; previous revised up), above what was suggested by surveys and hard data. Pantheon Macroeconomics says that it may imply that the third element of ADP's model (the data which ADP collects itself from firms that use its payroll services) was stronger than expected. Accordingly, Pantheon's forecast for NFP has been nudged up to 225K from 200K.

EARNINGS GROWTH: The February CB Consumer Confidence indexes' "jobs plentiful" measure increased, while jobs "hard to get" dropped; the difference between the two consequently improved to a 16-year high, consistent with a jobless rate around 4%, according to Capital Economics, which also adds that labour market conditions are tight, and beginning to put upward pressure on wages. Meanwhile, respondents expecting incomes to increase hit a 15-year high; based on historical relationships, CapEco says, it hints that average hourly earnings growth will reach 3.5% by early 2019.

EARNINGS CAUTION: Some are treating last month’s rise in AHE with caution. RBC points out that wage growth was not broad-based (production and non-supervisory workers, making up 80% of the workforce, saw no rises). Others argue that weather-related factors may have been in play. It is worth noting that in January, the U6 measure of unemployment (‘underemployment’) ticked up by 0.1ppts to 8.2% despite the rate of participation remaining stable.

BUSINESS SURVEYS: ISM non-manufacturing survey's employment component fell 6.6 points in February, down to 55.0 points. While the monthly drop appears large, it merely returns the employment index to its average level for 2017, Oxford Economics points out, adding the index remains safely in expansionary territory, indicative of a healthy labour market. ISM manufacturing survey's employment component rebounded 5.5 points to 59.7 in February, after falling 3.9 points in January, consistent with solid payroll growth. Some respondents cited labour shortages as their 'biggest challenge' and OxEco says this may present an obstacle for continued gains in the employment component ahead.

UNEMPLOYMENT CLAIMS: Weekly claims rose slightly to 231k in the latest week, but we came off levels last seen since 1969. The four-week moving average is currently knocking around 222.5k, slightly below the 225k (w/e 3/Feb). While claims data usually is subject to the usual caveats regarding its ‘noisiness’, analysts are giving credence to the data amid other evidence of tight labour markets, making it tough to fill vacancies. Indeed, this was alluded to in the Fed’s latest Beige Book, with several districts noting worker shortages in most sectors. (It is also worth noting that the latest Beige Book made 11 references to “wage pressures”, up from eight mentions a year ago, as UBS points out).

LAYOFFS: Announced job cuts remain low, Challenger reported, with announced job cuts falling to 35.369k (prev 44.653k). So far this year, Challenger says, employers have announced 80,022 cuts, 3.5% lower than through February last year, and the lowest number of announced job cuts between January and February since 1995. The consultancy also adds that announced job cuts have been under 50k for 22 straight months, the longest streak in its tracking.

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Focusing next on Goldman - which is usually the lead penguin in the sellside analyst procession and everyone else follows - the bank expects 210k jobs in February, 10k above consensus as a result of "warmer weather and unseasonably light snow during the survey week.... Labor market fundamentals also appear solid and may have improved further, given new cycle records for initial claims and Conference Board job availability."

Following a 4th consecutive 4.1% reading, Goldman also estimates the unemployment rate fell to 4.0% in February, which probably means another half a million people dropped out of the labor force. Additionally, a sharp unexplained rise in African American jobless rates seems likely to reverse, after adding a tenth to the January unemployment rate.

On the most important thing, hourly earnings, Goldman estimates a 0.3% month-over-month increase in average hourly earnings: "We anticipate a boost to average hourly earnings from favorable calendar effects in February. However, we see the risks to this estimate as skewed to the downside as the calendar effect is not particularly large, and we estimate the year-over-year rate fell a tenth to +2.8%."

Some more details from Goldman, first arguing for a stronger report:

  • Weather. NOAA weather-station data indicate that snowfall during the survey week was unseasonably low, both on an absolute basis and relative to January. As shown in Exhibit 1, our measure of population-weighted snowfall would suggest a boost to job growth relative to trend of around 15-35k (the right axis is inverted).

Exhibit 1: Snowfall Was Below Seasonal Norms and Declined from Survey Week to Survey Week

  • Jobless claims. Initial jobless claims fell to a new cycle low during the five weeks between the payroll reference periods (227k vs. 244k for January), and the absolute level suggests a very low pace of layoffs. Additionally, continuing claims edged lower, falling 6k from survey week to survey week.
  • Manufacturing-sector surveys. Manufacturing-sector surveys generally improved in February, and the ISM employment component in particular rose 5.5 points to 59.7. Our manufacturing employment tracker rose 1.8pt, also to 59.7, suggesting a solid pace of job gains in that sector. Note also that the payroll reference period preceded the steel and aluminum tariff announcement by the Trump administration. Manufacturing payroll employment rose 15k in January and has increased by 22k on average over the last six months.
  • ADP. The payroll processing firm ADP reported a 235k increase in February private payroll employment, 35k above consensus expectations. While some of the February strength may have reflected firmness in the financial and economic indicators used as inputs in the ADP model, we think the strong report nonetheless provides incremental evidence that the pace of job growth remained firm.
  • Job cuts. Announced layoffs reported by Challenger, Gray & Christmas pulled back 2k to 32k (SA by GS), its third consecutive decline. On a year-over-year basis, announced job cuts also declined by 2k.

Arguing for a weaker report:

  • Job postings. The Conference Board’s Help Wanted Online (HWOL) report showed a 3.8% decline in online job postings (mom sa), the first outright drop in 5 months. We place limited weight on this indicator, in light of research by Fed economists that suggests the HWOL ad count has been depressed by higher prices for online job ads. The Conference Board is currently reviewing its methodology accordingly.

Neutral factors:

  • Service-sector surveys. Service-sector employment surveys improved on net in February, as our non-manufacturing employment tracker rose 0.9pt to 56.0. However, the sharp drop in the ISM non-manufacturing employment component (-6.6pt to 55.0) highlights the lack of consistency across measures. Encouragingly though, the Conference Board labor market differential – the difference between the percent of respondents saying jobs are plentiful and those saying jobs are hard to get – rose to a new 16-year high (+3.8pt to +24.7). Service-sector job growth picked up to 139k in January and has increased 127k on average over the last six months.

Here again, for your amusement, is Goldman trying to refute how the drop in the hours worked had nothing to do with the increase in wages per hour:

We estimate average hourly earnings increased 0.3% month over month. In the last employment report, average hourly earnings rose 0.34% and the year-on-rate improved to 2.9%, four tenths above the pace in the December report. While average hourly is noisy and often mean-reverting, there are no obvious distortions that can explain last month’s upside surprise. Calendar effects should have been negative, one-off tax reform bonuses are outside the scope of average hourly earnings, and while minimum wage hikes probably boosted the month-to-month change at the margin, the strength was concentrated among higher-paid supervisory and nonproduction workers.

One popular narrative in the marketplace is that the firming wages in the last report were the result of a weather-related decline in the workweek. While we have argued that the total dollar value of payrolls tends to be “stickier” than hours, we believe these effects primarily relate to calendar configurations and payroll-system reporting, as opposed to weather. And as shown in Exhibit 3, the January wage strength was not concentrated in industries with a declining workweek (retail trade being the key exception). In fact, wage growth was relatively strong among industries with a flat workweek, most notably the large professional services and education and health categories. We instead expect a boost from favorable calendar effects. However, we view the risks to our 0.3% estimate as skewed to the downside, as the boost we expect from favorable calendar effects (the survey week ending on the 17th) is not particularly large. Reflecting this, we forecast a one tenth decline in the year-over-year rate to 2.8%.

Exhibit 3: No Compelling Relationship between January Wage Growth and the Workweek

Finally... the flu?

Relatedly, we note that elevated flu activity in January (relative to seasonal norms) may have played a role in the decline in the workweek last month, and indeed the household survey “Not at Work: Own Illness” series showed a sizeable increase (+198k to 1,283k). However, we find no compelling relationship between this series and average hourly earnings growth (or with nonfarm payrolls). We suspect this reflects the inclusion of paid sick leave in the payrolls and earnings statistics (as well as in the workweek). Taken together, we do not expect a significant unwind in average hourly earnings in tomorrow’s report.

Translation: as hourly worked rebounds hard, average hourly earnings will slide, and the 10Y and stocks will surge as the great and fake wage inflationary scare of February is finally long forgotten.