Goldman Previews Today's Jobs Number: "Prospects For Near-Term Improvement Look Dim"

Today's NFP number will be, as usual, critical. On one hand, Obama needs an ugly number to get the bipartisan support urgently needed to pass his jobs bill. On the same hand, Bernanke needs the market to drop, and the short covering rally to end and the market to plunge in order to have a carte blanche backstop for QE3 when the GDP prints negative. On the other, a sub zero NFP will send stocks into a tailspin, and facilitate the drop into a full out recession, with the "wealth effect" disappearing even for the "1%." To make some sense out of what to expect in under one hour, here is Goldman's Andrew Tilton with a full, and surprisingly downbeat, preview of what to expect. "The September employment report should look slightly better than its predecessor, at least on the surface. The underlying trend in hiring still appears very weak, perhaps even weaker than August. But recent US growth data have been mildly encouraging, layoffs have stayed fairly low and the headline payroll number will be boosted by the return of 45,000 striking communications workers. We expect a gain of 50,000 nonfarm payroll jobs, with the unemployment rate holding steady for a third straight month at 9.1%."

From Goldman Sachs:

With government support for the economy apt to decrease in the coming year as spending cuts are implemented and some short-term stimulus measures expire, the labor market will become even more important to sustaining economic growth. After accounting for inflation and tax changes, household income is up only 0.3% year-over-year. With fiscal stimulus fading and little easing in key commodity prices (particularly gasoline) thus far, better labor income growth is therefore key.

Unfortunately, the prospects for near-term improvement look dim. We summarized last month's employment report, which featured a stall in payrolls and an unchanged unemployment rate, with the comment that "Barring further shocks to the economy—most prominently, European financial stress and the potential for much tighter US fiscal policy in 2012—recent employment trends point neither to much further deterioration nor to substantial improvement." (See "Four Perspectives on the August Employment Report", US Daily, September 6.) What's changed since then? Clearly, the economic outlook has darkened, with the main culprit the intensification of financial and sovereign stress in Europe. Our European team now forecasts a recession in the Euro area beginning in the fourth quarter. We also see slower growth in the US economy over the year ahead, though recession is still not our base-case forecast.

In terms of labor market indicators specifically, the latest news suggests that in September:

1. Hiring was very soft, possibly even softer than August. The chart below illustrates two measures of hiring activity: the number of new online job advertisements (as tallied by the Conference Board) and the share of businesses reporting an increase in employment (from the detail of the Institute for Supply Management's monthly non-manufacturing survey). Job postings stabilized in September, after falling in the prior two months; that could be considered a modestly positive sign. But the share of service-sector businesses reporting increases in employment continued to decline in September, suggesting that hiring weakened further; as this particular survey was conducted late in the month (after the employment survey) it is unclear how much effect we'll see in tomorrow's numbers, but it doesn't bode well for October payrolls--the ISM survey seems to have led job advertising slightly over the past few years. Meanwhile, the September ADP Employment Report suggested a similar underlying pace of employment growth as in August.
Hiring on Hold?

2. Layoffs increased slightly. As of the week of September 11-17 (the week the employment survey was conducted), the four-week moving average of new jobless claims was 422k, up from 404k in August, suggesting a slight increase in the rate of job cuts. The latest Challenger, Gray, and Christmas survey showed a sharp rise in layoff announcements in September, to 115,700 from a monthly average of 45,000 in January-August. However, almost the entire increase was accounted for by a reduction in US Army employment and the announcement from Bank of America that it would reduce employment by 30,000 (which is based on a three year plan and thus likely overstates the near term impact), so we don't see this as a definitive sign that layoffs have increased sharply.

3. Strikers returned to work. In August, approximately 45,000 communications workers were on strike, depressing the reported payrolls number (workers need to receive pay during the reference pay period to be counted as employed). Those workers will be back on payrolls in September, for a net swing of +90,000 in the level of payrolls -- so the hiring trend would have to have deteriorated quite significantly for this payroll report not to show some improvement.

In sum, the return of striking workers should keep payroll growth in positive territory despite what may be a deterioration in the underlying pace of hiring, as well as a slightly higher pace of layoffs. We expect the September payroll report to show a gain of 50,000 nonfarm payroll jobs. With ongoing losses in government employment (somewhat more uncertain this month, as state and local educational employment often shows large changes in September), this is consistent with an increase of approximately 75,000 in private sector payrolls. Given our expectations for a small gain in overall employment, we forecast no change in the unemployment rate in September; if correct, this would be the third consecutive month at 9.1%. Average hourly earnings are likely to show weak growth, up 0.1% on the month.

Under the surface, the combination of a slowdown in hiring with (at least so far) no big increase in layoffs is consistent with a sharp increase in economic uncertainty--causing businesses to freeze hiring plans, but not yet inflicting the economic damage that would prompt an outright reduction in employment. If this uncertainty is resolved in the short run, we could see a temporary surge in employment as firms catch up on postponed hiring plans. But the longer uncertainty persists, the greater the risk of a vicious cycle of weaker hiring, weaker income, and weaker demand that ultimately ends in recession. This is why employment and the unemployment rate are such useful indicators of whether economic growth has fallen below "stall speed", and so closely followed by markets.


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