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May Payrolls Preview: It’s Finally Time For A Solid Beat

Courtesy of ZeroHedge. View original post here.

While the world suddenly has a whole lot of other risks on its plate to worry about, be it Italian and Spanish politics – with both nations set to welcome new, controversial governments – with Trump launching tariffs against some of America’s closest allies and a potential China trade war looming just two weeks away, the last thing traders need right now if even more stress about yet another potential surprise in tomorrow’s payrolls report, the biggest macro event of the week and arguably, the month. And, as the chart below shows, after two consecutive and not immaterial misses,  and 6 misses in the past 8 months, it’s about time for a solid payrolls “beat”, even if nobody cares anymore about the number of part-time waiter and bartender jobs created and the only thing that matters is wage growth, or the lack thereof.

So what does Wall Street expect in tomorrow’s report? Courtesy of RanSquawk, here is a full breakdown:

  • Non-farm Payrolls: (Exp. 188k, Prev. 164k)
  • Unemployment Rate: (Exp. 3.9%, Prev. 3.9%)
  • Average Earnings Y/Y: (Exp. 2.7%, Prev. 2.6%)
  • Average Earnings M/M: (Exp. 0.2%, Prev. 0.1%)
  • Average Work Week Hours: (Exp. 34.5hrs, Prev. 34.5hrs)
  • Private Payrolls: (Exp. 183K, Prev. 168k)
  • Manufacturing Payrolls: (Exp. 20k, Prev. 24k)
  • Government Payrolls: (Prev.-4k )
  • U6 Unemployment Rate: (Prev. 7.8%)
  • Labour Force Participation: (Prev. 62.8%)

LABOUR MARKET TRENDS: Last month, the US added 164k nonfarm payrolls, easing from the recent average pace; over the last 6-months, payroll growth has averaged 198k, slightly firmer than the 12-month pace of 190k. The 3-month average has been easing over the last quarter, and is currently running at a clip of 208k.

ADP PAYROLLS: The latest national employment report from ADP reported that 178k nonfarm payrolls were added to the US economy in May, missing expectations of 190k. “What’s not clear, though, is whether the below-trend numbers for April and, it seems, May, are due to a softening in labor demand, perhaps triggered by all the talk of trade wars, or are due to the shortage of qualified staff,” Pantheon Macroeconomics said, “If the problem is on the demand side, we don’t know if it will las t; most of the business surveys softened in April, but the regional reports available for May so far have rebounded strongly.” Accordingly, Pantheon is inclined to suggest that the overall landscape of the labor market has changed little in the month. Pantheon forecasts 200k payroll additions in the official employment situation report, though says that even if the number is closer to 175k, that’s still more than enough to keep the  unemployment rate trending down.

EARNINGS GROWTH: Moody’s chief economist Zandi has suggested that US job growth trends are strong, but slowing, with business unable to fill a record number of open positions. Zandi said that, as a result, wage growth is accelerating in response, most notably for young, new entrants and those changing jobs. Finding workers is increasingly becoming businesses number one problem.”

LAY-OFFS: Challenger reported job cuts stood at 31,517 in May – the lowest monthly total since October 2017 – down over 12% versus April, and around 5% lower versus May 2017. Challenger did note that on average, job cuts are at their lowest in May and June, and companies typically make their staffing moves at the beginning of the year or in Q4. Elsewhere, it added that so far in 2018, employers have announced around 208k job cuts, 6.2% more than the approximately 196k announced through the first five months of 2017.

UNEMPLOYMENT CLAIMS: Weekly unemployment claims data fell to 221k (versus 234k the prior week) and the four week average standing at 222,250, lower than the 228,250 heading into last month’s payrolls data. Analysts have been encouraged by the recent trend, and suggest that the trend rate has now fallen into the low 220,000s, which would be a record low as a percentage of the employed work force.

BUSINESS SURVEYS: Note, ahead of this month’s employment situation report, we have not had the monthly ISM surveys, which contain employment sub-indices – these are on the docket for release post the NFP data. We did,  however, get PMI data from Markit, with the data compiler saying that a “solid rate” of employment growth was  maintained in May, linked to long-term business expansion plans and upbeat projections of client demand in the months ahead.

* * *

Finally, via Goldman, here are some bullish, bearish and neutral considerations ahead of tomorrow’s report:

Arguing for a stronger report:

  • Jobless claims. Initial jobless claims fell to a new cycle low during the four weeks between the payroll reference periods (214k vs. 232k for April and the previous cycle low of 225k). Additionally, continuing claims resumed their downtrend, falling at their fastest pace in three years (-92k, survey week to survey week). While jobless claims have a mixed track record of predicting the employment report, we note that sizeable declines in continuing claims are associated with strong payroll gains, particularly since 2012 (claims data in the 2009-2011 period was heavily affected by benefit expirations and eligibility changes). As shown in Exhibit 1, monthly payroll growth has exceeded 200k in each of the nine instances since 2012 when continuing claims fell by 75k or more during the payroll month (and payroll growth has averaged +267k in these instances). The 92k decline in continuing claims in May also suggests scope for further declines in the unemployment rate in coming months.
  • Manufacturing-sector surveys. Manufacturing-sector surveys were particularly strong in May across both their headline and employment measures. Our manufacturing employment tracker rose 0.9pt to an elevated level of 59.2, and our headline aggregate jumped 2.8pt to a new cycle high of 60.5. This strength echoes commentary in the May Beige Book indicating production activity “shifted into higher gear.” Manufacturing-sector payrolls rose 24k in April and have increased 28k on average over the last six months.
  • 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 3.9pt to +26.6 in May, a 17-year high. Relatedly, the JOLTS report showed job openings rising to a new cycle high at the end of March.
  • Weather. NOAA weather-station data indicate that snowfall was unusually high in both March and April (on a population-weighted basis), and we believe this likely contributed to the weaker-than-expected job gains in both months. With weather returning to normal in May (temperatures rose 16 degrees survey week to survey week, nsa), we expect job growth to firm in tomorrow’s report. Relatedly, we note that April payrolls were flat in the Midwest and Northeast regions on net, suggesting scope for reacceleration in those regions.

Arguing for a weaker report:

  • Labor supply constraints. We see the labor market as at or a bit beyond full employment, and at some point, diminished slack should exert downward pressure on job growth. In past research, we found that labor supply constraints are particularly likely to weigh on job growth during the late-Spring hiring season. At the same time, the sizeable drop in continuing jobless claims this May suggests employers successfully targeted pockets of labor market slack (in order to fill job openings).

Neutral factors:

  • Service-sector surveys. Service-sector surveys improved meaningfully on net in May, and our non-manufacturing employment tracker rose 2.0pt to 57.0. While the employment components edged down 0.1pt on net, they too remain at a healthy level (55.1). Service-sector job growth slowed to 115k in March and 119k in April, compared to the 12-month average of 143k.
  • ADP. The payroll processing firm ADP reported a 178k increase in May private payroll employment, 12k below consensus. In past research, we’ve found that large surprises in the ADP report tend to be predictive of the subsequent nonfarm payroll surprise. Given the relatively modest downside in the May ADP report, we see little incremental information relevant for tomorrow’s payroll data. ADP job growth had also been running above the BLS measure in recent months, and the softer May report may have reflected mean-reversion in the ADP model (as opposed to a slowdown in job creation among ADP’s customer base).
  • Job cuts. Announced layoffs reported by Challenger, Gray & Christmas edged up 6k to 37k in May (SA by GS), on the lower end of its 12-month range. On a year-over-year basis, announced job cuts fell 2k.

Finally, here is Goldman’s take on tomorrow’s all important wage growth number:

We estimate average hourly earnings increased 0.2% month over month, reflecting unfavorable calendar effects. The survey week ended on the 12th of the month, and this is historically associated with below-trend growth in average hourly earnings. To the extent that winter storms reduced hours worked in March and April, this would also argue for potential downside in tomorrow’s wage growth numbers, given the return to normal weather in May and the tendency for earnings to be “stickier” than hours. Taken together, we look for a 0.2% month-over-month gain that leaves the year-over-year rate unchanged at 2.6%.


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