vrijdag 2 juni 2017

May Payrolls Preview: The Tiebreaker

After a poor March jobs report, followed by an April scorcher, the May payrolls report due at 8:30am on Friday will be the tiebreaker, not only for the current state of the economy where both soft and hard data have been deteriorating in recent weeks, but perhaps also for the June rate hike decision, which as the Fed noted in its May FOMC minutes, may not take place without "evidence" that the recent "transitory weakness" in the economy is over. Here are the consensus expectations for tomorrow's report:
- May Nonfarm Payrolls Exp. 185K (Range 140K to 235K) vs April 211K
- Unemployment Rate Exp. 4.4% (Range 4.30%-4.60%) vs April 4.4%
- Average Hourly Earnings M/M Exp. 0.20%, vs April 0.30%; Y/Y Exp. 2.60%, vs April 2.50%
# Payrolls Expectation; In terms of overall expectations, the consensus is looking for 185k nonfarm payrolls to be added to the US economy in May, the same as the April consensus - compared to 211k actual jobs added in April. That according to RanSquawk would be in line with the 185k/month pace seen in 2017 thus far. On one hand, there is potential for upside surprise, as per today's stellar ADP report which came in at 253K, far above the 185K expected. On the other, Goldman believes a favorable swing in the weather between the March and April survey periods boosted last month's hiring pace, and suggests the 211k pace of April job growth "likely overstates the near-term underlying trend", as such there will be payback in the May report. Also, Goldman cautions that the ADP measure has been running above official private payroll growth so far this year, by 60k per month on average, so take it with a grain of salt.
# Unemployment rate; The unemployment rate is forecast to hold steady at 4.40%, matching the lowest reading recorded since 2001, and beneath the FOMC’s NAIRU projection between 4.70% and 5.00% (made in its March forecasts). A 4.4% print would be stronger than the Fed’s own year end forecast of 4.50%. If May unemployment stays at or near that level, it would be further evidence the economy has reached full employment and is at full capacity, meaning virtually everyone seeking work has found a job, even if that doesn't explain why wage growth remains anemics. If the rate dips lower, that could put upward pressure on wages and inflation, or alternatively it will prompt questions about the quality of jobs added.
# Earnings;  As a result, most of the attention is likely to fall on the earnings data for signs of inflationary pressures. Average hourly earnings (AHE) are seen rising by 0.20% M/M, easing a touch from the +0.30% pace seen in April. On an annualised basis, the pace of AHE growth is seen rising by 0.10 ppts to 2.60%. In its latest Beige Book, the Fed stated that “most firms across the districts noted little change to the recent trend of modest to moderate wage growth,” though many firms reported offering higher wages to attract workers “where shortages were most severe.” According to RanSquawk, HSBC notes that though wage growth has picked up, as of late, it remains sluggish when compared to previous cycles. Looking at the May wage number in particular, Goldman warns there may be a negative surprise pointing out that the May payroll period ended on the 13th, which is associated with meaningfully below-average wage growth.
*) Goldman's summary: We estimate nonfarm payrolls increased 170k in May, a moderate slowdown from April’s +211k pace and modestly below the three-month moving average of +174k. While labor market fundamentals remained broadly stable, featuring a further decline in continuing jobless claims, recent deterioration in service sector employment surveys suggests hiring may be slowing at the margin. We also believe a favorable swing in the weather between the March and April survey periods suggests the 211k pace of April job growth likely overstates the near-term underlying trend, which we believe is closer to 175k (and should slow further as the economy moves beyond full employment). Relatedly, May is also an important hiring month, and labor supply constraints in some geographies and industries suggest some additional downside risk. On the positive side, both jobless claims and the ADP report suggest more favorable labor market fundamentals, and the end of the federal hiring freeze suggests scope for above-trend growth in federal employment.
# On wages, Goldman warns there may be disappointment: We estimate average hourly earnings increased 0.2% month over month and 2.5% year over year in May, reflecting the interaction of firming wage growth with negative calendar effects. The May payroll period ended on the 13th, which in our model is associated with meaningfully below-average wage growth. However, we are more constructive on wage growth generally, exemplified by the acceleration in the employment cost index to a cycle-high pace in Q1....