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August Nonfarm Payrolls Preview: Prepare For A Downside Surprise

Tomorrow at 8:30am ET, the BLS will release the August jobs report: payrolls are expected to rebound to 198k from 157K after printing above 200k in the prior two months. However 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 ignore the payrolls print 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:

  • Non-farm Payrolls: Exp. 198k, Prev. 157k
  • Unemployment Rate: Exp. 3.8%, Prev. 3.9% (NOTE: the FOMC projects unemployment will stand at 3.6% at the end of 2018)
  • Average Earnings Y/Y: Exp. 2.7%, Prev. 2.7%
  • Average Earnings M/M: Exp. 0.2%, Prev. 0.3%
  • Average Work Week Hours: Exp. 34.5hrs, Prev. 34.5hrs
  • U6 Unemployment Rate: Prev. 7.5%
  • Labour Force Participation: Prev. 62.9%

While most commentators are optimistic, one bank that stands out with its muted outlook is Goldman, which expects that payrolls increased 175k in August, below the consensus of 195k. Goldman cautions that while continued strength in employment surveys and jobless claims data suggest underlying labor demand remains solid, it expects a drag of around 40k from negative residual seasonality. The result has been August payroll growth that has been below consensus in each of the last seven years and below the three-month average in each of the last eight (see chart below).

Another potential risk-factor: uncertainty following the imposition of July tariffs may have delayed hiring activity, and ADP private payroll growth unexpectedly slowed to a 10-month low.

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

  • LABOR MARKET TRENDS: A three-month moving average of monthly payrolls data has been ticking up over the last few months, with that rate running at around 224k in July, the highest since February 2018. The six-month moving average is running at 221k, the fifth straight month where the metric was above 200k. Finally, over the last three months, the 12-month moving average has been knocking between 200-203k.
  • WAGE GROWTH: In July’s Employment Situation Report, average hourly earnings ticked up by 0.26% MM, largely driven by supervisory workers, with non-supervisory workers hourly pay growth lagging with a rise of 0.13%. UBS notes that wage growth is still falling short of the pace of the rebound in inflation. “Last year’s real wage gains of about 0.5% have transformed to real wage losses over the past 12 months. We expect that real wage growth will pick up over the next six months driven as headline inflation slows following an energy-induced surge earlier this year.” UBS expects MM wage gains of 0.24% in August, and projects AHE YY will rise to 2.9% this year (vs 2.7% in 2017), and then rise at a clip of 3.2% in 2019 as the jobless rate falls to 3.5% by the end of next year and inflation rises. “The projected wage increases are a step up from the pace of wage growth that we have seen in recent years,” UBS says, noting still that “wage inflation remains well below the peaks experienced in past cycles.”
  • ADP PAYROLLS: Missed expectations of 188k in August, printing 163k, and the prior was revised down by 2k to 217k. “Although we saw a small slowdown in job growth the market remains incredibly dynamic,” ADP commented. “Midsized businesses continue to be the engine of growth, adding nearly 70 percent of all jobs this month, and remain resilient in the current economic climate.” Moody’s Analytics’ Zandi, was more optimistic: “The job market is hot. Employers are aggressively competing to hold onto their existing workers and to find new ones. Small businesses are struggling the most in this competition, as they increasingly can’t fill open positions.”
  • LAY-OFFS: Challenger reported that August’s announced downsizing rose to the third highest total in 2018 at 38,427, the highest since March (where 60,357 was printed), and the third time this year that announced job cuts exceeded the corresponding month for the previous year. “August job cut announcements seem to indicate the summer lull is over. Companies are assessing global market conditions and adjusting staffing levels accordingly.” Commenting on tariffs, Challenger also added that “last month saw an increase in companies attributing job cuts to tariffs, specifically tariffs on imported steel, which are ongoing, and newsprint, which have recently been overturned.” Looking ahead, Challenger said hiring announcements were up in August to 17,274, the highest total since February.
  • UNEMPLOYMENT CLAIMS: In the survey week for August (week ending August 18), initial jobless claims ticked down to 210k, with the four-week moving average at 213,750 (versus the 208k, and 220,750k four-week moving average in the previous survey window); Morgan Stanley’s analysts say this signals that firing flows remain low and should remain supportive of net job growth.
  • BUSINESS SURVEYS: The ISM’s reports on business have painted a healthy picture for the labour market. The manufacturing ISM’s employment sub-component rose by 2 points in August to 58.5, the 23rd straight month the sub-index has been in expansion territory. “Employment continued to expand, supporting production growth during the month,” ISM said, and “respondents continued to note labor-market issues as a constraint to their production and their suppliers’ production capability.” In the services sector, the employment sub-component rose by 0.6 points to 56.7; ISM, citing respondents, noted that “employee retention is getting much more challenging” and “losing people to attrition [and] having trouble replacing [them] in the current market.”

Meanwhile, back to Goldman, the bank lists several factors arguing for a weaker August job report:

  • Residual seasonality. Payrolls have exhibited a tendency toward weak readings in August, which may reflect a recurring seasonal bias in the first vintages of the data. In Exhibit 1, we show first-print payroll growth in August relative to consensus estimates and relative to the previously published three-month moving average (i.e. the average in May, June, and July, as published in the July employment report). August payroll growth has been below consensus in each of the last seven years and below the three-month average in each of the last eight (consensus for tomorrow’s report is 195k and the 3-month average is currently 224k). This August weakness has also tended to occur in many of the same industries—including manufacturing, professional services, retail, and information—and we estimate that residual seasonality could weigh on headline payroll growth in tomorrow’s report by 40k or even more.

  • ADP. The payroll-processing firm ADP reported a 163k increase in August private payroll employment—37k below consensus and the slowest pace in 10 months. While some of the sequential weakness may have reflected the July stepdown in the BLS measure—an input to the ADP model—the report nonetheless suggests that the pace of hiring may have moderated somewhat. We also note that the negative residual seasonality we expect in tomorrow’s nonfarm payroll report is not visible in the ADP measure.
  • Tariff uncertainty. Trade tensions escalated just before the start of the August payroll month (the five weeks ended August 18th), as the White House imposed a 25% tariff on $34bn worth of Chinese imports on July 6th and released a list of another $200bn worth of Chinese goods potentially subject to tariff on July 10th. While jobless claims suggest layoff rates remained very low in the wake of these developments, tariff-related uncertainty may have weighed on hiring activity in industries exposed to the risk of retaliation (or whose supply chains rely upon these imports).
  • Job cuts. Announced layoffs reported by Challenger, Gray & Christmas rebounded by 13k in August to 42k (SA by GS). On a year-over-year basis, announced job cuts rose 5k.