Previewing Tomorrow's Payroll Report

The median estimate for tomorrow's all-important report is a +100k change in non-farm payrolls (up from last month's +69k) with Stone & McCarthy topping the table at +165k and Jason Schenker of Presitge Economics all doom-and-gloom at +35k. Everyone's favorite permabull-coz-of-QE3-advocate, Joe LaVorgna, is a more negative-than-consensus +75k and Hatzius et al. at Goldman just notched it up to +125k; but we focus on what Morgan Stanley's David Greenlaw has to say as they appear to have the best handle on just how significant an impact the weather has had on job growth data. Most importantly, given the Fed's admitted focus on the labor market, this is the last employment report before the End-of-July FOMC fireworks.



David Greenlaw, Morgan Stanley: Jobs & Fireworks

The BLS releases the June employment report on Friday. We look for a 90,000 rise in payrolls and an unchanged unemployment rate of 8.2%. When we first published our forecast a couple of weeks ago, it seemed that the consensus estimate for payrolls might be a bit higher. But, as of this morning, the consensus is identical to our own forecast.


Payroll growth has moderated quite a bit in recent months.


Two factors appear to be at work. First, unusually mild weather conditions during the winter months clearly contributed to a sharp pickup in job growth. Indeed, data from the National Oceanic and Atmospheric Administration indicate that average temperatures across the US, on a population-weighted basis, were warmer than normal every single week from early November to late April. This is an incredible string of mild weather that helped to avoid a portion of the typical seasonal cutbacks in employment that occur every winter. Over the past couple of decades, the year that appears to be most similar from the standpoint of heating degree days deviation was the winter of 2005-06. In that case, payroll gains were elevated during the winter months followed by an obvious weather-related payback in the spring.



Secondly, there also seems to have been some underlying deterioration in labor market conditions of late. It will take a few months to sort out the relative impact of weather and the underlying fundamentals, but the recent uptick in jobless claims suggests that there has been some deterioration in conditions. Indeed, on a 4-week average basis, initial claims for unemployment insurance rose by 12,000 between the May and June survey periods – one of the worst performances seen during the current recovery. So, even though the negative weather-related influence in recent months should now be waning, we look for another subpar payroll gain in June and are becoming increasingly concerned about the trajectory of job growth going forward.


Friday’s employment report will be the last one issued before the July 31/Aug 1 FOMC meeting. Fed policymakers have been placing a considerable amount of emphasis on the state of the labor market. So, there is a chance that the FOMC could conceivably take further action at the next meeting if Friday’s report is disappointing – perhaps by shifting to outright QE by merely cancelling the sales of short-term Treasury securities that are used to sterilize asset purchases. However, given that this is a divided FOMC which appears to be resigned to the status quo, the bar to such action seems relatively high at this point.