December Payrolls Preview: Beware "Good News Is Bad News"

While the government may be closed, the BLS is one of the agencies that managed to secured funding, which is why at 8:30am ET the December payrolls report will be released. Consensus expects +180k payrolls with average hourly earnings seen falling to 3.0% from 3.1% while the jobless rate remains unchanged at 3.7%.

While the report is unlikely to make a major dent in market sentiment, especially if it disappoints as trader mood on the economy is already quite dismal, it is safe to say that data takes more importance with a data-dependent Fed amid signs of economic momentum losing steam globally; that's why any major upside surprises would be a classic case of "good news is bad news" because should the report indicate more labor market overheating (and after today's surprisingly strong ADP that is a possibility) market expectations of no more rate hikes may be dashed.

Here are some more details what to expect tomorrow, courtesy of RanSquawk:


  • Non-farm Payrolls: Exp. 177k, Prev. 155k
  • Unemployment Rate: Exp. 3.7%, Prev. 3.7% (NOTE: the FOMC projects unemployment will stand at 3.5% at the end of 2019, and 4.4% in the longer-run)
  • Average Earnings Y/Y: Exp. 3.0%, Prev. 3.1%
  • Average Earnings M/M: Exp. 0.3%, Prev. 0.2%
  • Average Work Week Hours: Exp. 34.5hrs, Prev. 34.4hrs
  • Private Payrolls: Exp. 175k, Prev. 161k
  • Manufacturing Payrolls: Exp. 20k, Prev. 27k
  • Government Payrolls: Prev. -6k
  • U6 Unemployment Rate: Prev. 7.6%
  • Labour Force Participation: Prev. 62.9%

THE HEADLINE TREND: The 12-month average of headline nonfarm payrolls is 204k (Dec 2017-Nov 2018), and as such, the consensus view looks for a slowing in the pace of payroll additions. This is in spite of the weather-related impact of the November 2018 report, some suggest. Analysts at Barclays expect a slowing in the trend rate of payroll growth this year, on account of a smaller impulse from fiscal stimulus, which has led them to expect less employment growth. "As a result," Barclays says, "we expect growth in nonfarm payrolls to slow from the roughly 200k per month pace observed in 2018 to something closer to 160k per month in 2019. Goldman expects 195K jobs tomorrow, higher than consensus but a modest slowdown in the trend of job growth, and a weather-related boost worth 25k or more. On the negative side, Goldman notes that "the pull-forward of holiday retail hiring into November could weigh on December job growth in that industry."

THE FED: With the Fed in data-dependent mode, and financial market jitters rife (revolving around the narrative of slowing global growth, trade wars/tariffs, equity market valuations, credit, Fed tightening, government shutdown, etc), questions have returned as to whether a positive report will be negative for risk, or vice versa. The rationale is that a poor report will imply the FOMC taking a slower approach to normalisation, which many think will help risk assets. However, despite the market's jitters and other risks, ING notes that business surveys remain in good shape, with any slowdown in job growth more a function of a lack of available workers rather than any cut backs to business expansion plans (at this stage, it notes). "The positive from this is that competition for workers will advantage employees through higher wages and benefit packages, which should be supportive for confidence and spending. This will also add to inflationary pressures in the economy and will keep the Federal Reserve on course to raise interest rates further in 2019," ING says, but adds that "officials will tread a more cautious path with intensifying economic headwinds coupled with the fact the Fed is also running down its balance sheet meaning we expect two 25bp rate hikes in 2019 versus the four experienced in 2018."

JOBLESS CLAIMS: It is difficult to use the latest weekly jobless claims data to gauge the underlying trend of the labour market, given that periods around Christmas can be tricky, while the weather and government shutdown related developments could also obscure the data and implied trend.  Accordingly, looking at initial jobless claims in the week ending 15 December (the BLS nonfarm payroll report reference period is the week of the 12th of the month) was 270k, the data showed a slight fall from the 225k in the November reference week, while the four-week moving average did rise to 222.75k from 218.75k.

ADP PAYROLLS: ADP reported a forecast beating 271k nonfarm payroll additions in December; the consensus expected 178k. Moody's economist Zandi noted that "businesses continue to add aggressively to their payrolls despite the stock market slump and the trade war. Favourable December weather also helped lift the job market. At the current pace of job growth, low unemployment will get even lower." Analysts at Pantheon Macroeconomics argued that the data presents upside risks to its 225k forecast: "Typically, ADP tends to undershoot the official numbers in months after weather events - November’s survey week was the coldest since 1997, at least - but we’d be very surprised by a 300Kplus reading in the official NFP data," Pantheon said, "we can’t imagine that 271K gains are remotely sustainable, but this report comes as a welcome jolt to the market’s favoured narrative that the economy is slowing sharply."

BUSINESS SURVEYS: The ISM manufacturing survey for December saw its employment sub component fall by 2.2 points to 56.2; ISM said employment continued to expand, supporting production growth, but at the lowest expansion levels since June 2018, when the index registered 56.0. Markit noted in its US manufacturing PMI for December the pace of job creation eased to an 18-month low, but didn't provide the index levels. NOTE: The December non-manufacturing ISM report is published next week, after the release of the Employment Situation Report, while the latest Markit services PMI report is scheduled for release on 4 January, after the release of the BLS payrolls data.

JOB CUTS: Challenger reported US employers had announced 32,423 job cuts in December, falling from the 53,073 seen in November. "We've seen a number of companies responding to changing consumer behaviour this year, and with tax savings and a strong economy, making staffing decisions ahead of a potential downturn next year,” Challenger said, "while December did see some fallout from suppliers, especially in the Midwest after GM’s November decision to cut 14,000 workers and close five plants, the big story this year was in Retail,” and adds that "while Retailers have made significant job cuts this year, the industry is also doing the bulk of hiring, albeit seasonally. It remains to be seen if Retailers cut these jobs in the New Year." Challenger also noted that the majority of job cut announcements were due to companies restructuring, while adding that it still remains to be seen what the impact of tariffs and trade deals will be on job cuts, warning that "the large-scale job cut announcements due to these tariffs have yet to be announced, it seems."

Finally, here is Goldman with several arguments for a stronger and weaker report:

Arguing for a stronger report:

Winter weather. Snowfall was elevated on a seasonal basis during the November payroll survey week, with winter storms in the Northeast and Midwest appearing to reduce regional and industry-level payrolls by around 20-30k (Exhibit 1), while also boosting the household “not at work due to weather” category. Taken together, this would suggest a boost to job growth relative to trend of 25k or more in tomorrow’s report.

ADP. The payroll processing firm ADP reported a 271k increase in December private payroll employment, above consensus expectations of +180k. While the inputs to the ADP model likely contributed to the strength, we believe the main takeaway from the ADP report is that the pace of job growth remained solid at the end of the year.

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 0.4pt to +34.6 in December, a new cycle high. JOLTS job openings rebounded in the most recent report (7,079k in October) and remain near the cycle high.

Company level one-offs. The conclusion of a two-month strike at Marriott hotels will add 4k to December job growth, while the layoff programs at Verizon (10k employees affected) and General Motors (14k workers to be affected) may not weigh on job growth until later in 2019.

Arguing for a weaker report:

Retail seasonality. We believe the timing of the November and December establishment surveys will likely weigh on retail job growth in tomorrow’s report, as the particularly early Thanksgiving holiday (November 22) probably shifted the timing of holiday retail hiring into November from December in the payrolls data. Retail job growth was firm in the November report (+18k, a six-month high), and December job growth has been flat or negative in each of the last four similar calendar configurations (-12k on average). Taken together, we believe the pull-forward of holiday retail hiring into November could weigh on job growth in that industry by around 10k in tomorrow’s report.

Service-sector surveys. Service-sector business surveys generally declined in December, as our headline non-manufacturing index decreased 2.9pt to 54.2, while the employment component also declined (-1.2pt to 53.6). Service-sector job growth rose 132k in November and averaged 147k over the last six months.

Neutral factors:

Jobless claims. Initial claims drifted up only marginally in December (averaging 223k over the payroll month vs. 218k in November). Continuing claims also remained range-bound, edging up 3k between the November and December survey weeks.

Manufacturing surveys. The employment subcomponents of manufacturing-sector surveys were mixed in December but generally remain at elevated levels. Both the headline aggregate (-5.2pt to 54.1) and employment (-2.2pt to 56.2) subcomponent of the ISM manufacturing survey decreased sharply in December, against expectations for a smaller decline. However, the employment subindexes of both the Philly Fed manufacturing index and the Empire Manufacturing index increased, and our manufacturing employment tracker remained at 57.5. Manufacturing payroll employment rose by 27k in November and has increased by 21k on average over the last six months.

Job cuts. Announced layoffs reported by Challenger, Gray & Christmas pulled back 10k in December to 51k (SA by GS). On a year-over-year basis, announced job cuts rose by 13k.

Tariff uncertainty. Trade tensions remain elevated, with the US imposing a 10% tariff on $200bn worth of Chinese imports on September 24. We continue to expect that the growth and employment effects of trade frictions will be modest in the US, and accordingly, we are not embedding an explicit drag in our December payroll estimates. That being said, we note the risk that increased uncertainty or the prospect of retaliatory tariffs may have weighed on hiring.

Pre-holiday transportation hiring. Transportation and warehousing payrolls have seen elevated growth in December in recent years, often followed by softer growth or outright declines in January and February. However, it appears that the BLS seasonal factors may have finally evolved to anticipate these trends (Exhibit 2), suggesting minimal scope for a large increase in this category.