July Nonfarm Payrolls Preview: Here's What To Expect

Tomorrow at 8:30am ETF, the BLS will release the July jobs report: headline payrolls are expected to slow modestly to 190k after printing above 200k in the past two months. With record low unemployment and a bubbly labor market fueled by Trump's stimulus, where labor shortages are said to be the biggest concern to companies, absent some "force majeure" in the words of Elon Musk, markets will focus squarely on average hourly earnings to gauge if inflationary pressures are finally seeping into wages (according to Cheesecake Factory the answer is a resounding yes).

Here are Wall Street's consensus expectations:

  • Nonfarm Payrolls: Exp. 190k, Prev. 213k (Min: 150k, Max: 240k)
  • Unemployment Rate: Exp. 3.9%, Prev. 4.0% (Min: 3.8%, Max: 4.0%)
  • Average Hourly Earnings Y/Y: Exp. 2.7%, Prev. 2.7% (Min: 2.6%, Max: 2.8%)
  • Average Hourly Earnings M/M: Exp. 0.3%, Prev. 0.2% (Min: 0.2%, Max: 0.6%)
  • Average Work Week Hours: Exp. 34.5hrs, Prev. 34.5hrs (Min: 34.4hrs, Max: 34.6hrs)
  • U6 Unemployment Rate: Prev. 7.8%
  • Labour Force Participation: Prev. 62.9%

More details on what to expects tomorrow, courtesy of RanSquawk:

  • LABOUR MARKET TRENDS: Last Month’s headline beat expectations (of 200k) with the US adding an 213k jobs in the month, below the 6-month average of 219k but above both the 3 and 12-month figures of 205k, and 196k respectively. Consensus looks for a slightly below trend increase of 190k in July.  “We expect headline payrolls to slow modestly after coming in about 200k in the past two months” says Credit Suisse, while UBS expects a payroll rise of 207k in July and note “we see strength across the spectrum as construction continues its robust expansion, manufacturing maintains momentum and education payrolls again rise above trends.” The jobless rate is expected to decline to 3.9% after ticking up to 4.0% (from 3.8%), Nomura notes the prior month’s uptick was “driven by an influx of workers into the labour market and weaker employment growth relative to its payroll counterpart.” On the tariff threat front, Goldman notes that "while trade policy uncertainty is likely on the rise, the recent escalation may have occurred too late to meaningfully impact tomorrow’s report."
  • PAYROLL GROWTH: The ADP report showed a rise of 219k (Exp. 185k) jobs in July with the prior revised higher by 4k to 181k in June. “The labour market is on a roll with no signs of a slowdown in sight,” said the VP of ADP Research Institute Yildirmaz. “Nearly every industry posted strong gains and small business hiring picked up.” The numbers provide of optimism ahead of the NFP release, however, it is worth noting the ADP has not been the most reliable indicator (see Figure 1). Furthermore, the ADP figure has been below nonfarm payrolls for the last three Julys, by an average of 30k.
  • EARNINGS GROWTH: Average hourly earnings are expected to increase 0.3% M/M, keeping the Y/Y growth at 2.7%. Credit Suisse shares this view, while adding “a tight labour market, better nominal growth, and some improvements in labour productivity should continue to put upward pressure on wages”. Average hourly earnings will be key for the future path of Fed policy as the FOMC decide whether to hike one or two more times this year, However, with one further employment report before the next FOMC decision, this may have less of an impact this time around.
  • LABOUR MARKET DATA: The employment component of the ISM manufacturing survey was consistent with strong job growth, showing a faster than expected expansion at 56.5 from a prior 56.0. The measure remains firmly above the expansionary threshold and has now been above 50 for 22 consecutive months. The non-manufacturing ISM report is not released until after NFP but the employment component of the flash IHS Markit services PMI fell to its lowest since January. Other US data has been mostly positive. In the NFP survey week, initial jobless claims dropped to their lowest level since December 1969 at 207k while the Fed’s latest Beige Book showed that worker shortages persisted in early July throughout most of the districts, which would suggest that the economy is close to or at full employment.
  • MARKET REACTION: A beat on expectations for nonfarm payrolls should initially strengthen the USD and weigh on bonds, and vice versa for a miss, BMO suggests: “Keep a close eye on aggregate work hours, as a further expansion would suggest the economy’s recent momentum carried into the third quarter.” On the other side, TD Securities says “USD could trade lower on combination of softer jobs/wage growth, with particular focus on USDJPY,” and in terms of rates, says “Treasuries could see disproportionate reaction to a weaker print, but we expect any bull steepening to be transitory as the curve continues to flatten.”

Commenting on tomorrow's report, economist David Rosenberg urges investors to keep an eye on the wage number, especially anything at or above 0.3%:

"The vast majority of responses in our poll for tomorrow's NFP number are 175k-200k. Good to see what the band is to gauge what can move the market. Also keep an eye on the wage number -- anything over +0.3% will raise some eyebrows."


Meanwhile, on the rosier sides, Goldman points out that the majority of economic factors leading into tomorrow argue for a stronger report. These include:

  • Service-sector surveys. Service-sector business surveys generally remained elevated in July. Despite a modest sequential decline in our non-manufacturing employment tracker (-0.3pt to 56.2), the measure remains within a point of its cycle-high. Service-sector job growth decelerated to +149k in June and has averaged 156k over the last six months.
  • Manufacturing surveys. Manufacturing-sector surveys also pulled back on net but they too remain elevated. Our manufacturing employment tracker fell by 0.3pt to 60.2 in July after reaching a new cycle-high in June. As shown in Exhibit 1, despite some sequential moderation in the survey responses, employers continue to report broad-based gains in employment across the two sectors. Manufacturing-sector payrolls rose 36k in June and have increased 26k on average over the last six months.
  • Jobless claims. Initial jobless claims declined during the four weeks between the payroll reference periods (averaging 221k vs. 224k in the June payroll month) and reached a 49-year low in the payroll survey week (208k). While continuing claims rebounded by 40k between the survey weeks, this followed sizeable declines earlier in the year (that may now be resuming).
  • ADP. The payroll processing firm ADP reported a 219k increase in July private payroll employment—33k above consensus and the fastest pace since February. While some of the strength may have reflected firmness in the financial and economic indicators used as inputs in the ADP model, the report nonetheless provides incremental evidence that the pace of job growth likely remains firm.
  • Job availability. 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 2.8pt to +28.1 in July, a new 17-year high. JOLTS job openings also remain close to record highs, despite their May declines (-202k to 6,638k).
  • Job cuts. Announced layoffs reported by Challenger, Gray & Christmas declined by 10k to 29k in July (SA by GS), a two-and-a-half year low. On a year-over-year basis, announced job cuts fell by 1k.

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Goldman notes that there is just one possible factor arguing for a weaker report:

  • Tariff uncertainty. While trade policy uncertainty is likely on the rise and may have weighed on the July ISM manufacturing report, the recent escalation may have occurred too late to meaningfully impact tomorrow’s employment numbers. Trade frictions began to escalate further on July 10th— four days before the end of the July payroll month–with the White House’s detailed proposal for a 10% tariff on $200bn worth of Chinese imports. As a result, any potential impact of these developments on hiring and layoffs may not manifest itself until the August employment report (on September 7th).