Non-Farm Payrolls Preview: When The Facts Change So Will The Perception

• ADP private payrolls for January come in stronger than expected at 213,000, estimate had been 178,000
• Jobless claims indicate a healthy labor market
• Scarcity of US statistics, the government shutdown and global concerns have prompted Fed caution despite the strength of the US economy

​​​​​​The US Labor Department will issue its Employment Situation Report on Friday February 1st at 8:30 am EST, 13:30 GMT.

More commonly known as non-farm payrolls, the monthly report charts the state of the US labor market with its closely watched figures on job creation, unemployment, average hourly earnings, average work week, labor force participation and other important statistics. The headline payroll number which estimates the number of new jobs created is the most widely followed and traded American economic statistic. It is one of the timeliest of the hard data series as its information is at most a month old

The report consists of two surveys, the establishment and the household. The establishment survey polls established non-farm businesses for the number, compensation, hours and other attributes of their employees. This survey produces the payroll, wage, participation and other numbers. The household survey contacts a representative sample of the US working civilian population and classifies each person as employed, unemployed or not in the labor force. 

Forecast

Non-farm payrolls are expected to rise by 166,000 in January following December’s burst of 312,000 new hires. The unemployment rate is predicted to be unchanged at 3.9% as are average annual hourly earnings at 3.2%. Earnings on the month are forecast to drop 0.1% to 0.3%.

US Economy: Strong fundamentals, shifting sentiment

The US economy expanded at 3.267% in the first three quarters. The Atlanta Fed estimate of 2.7% in the final quarter is less secure than usual as several statistics that would have been incorporated in the calculation, including December retail sales and personal income and spending, were not available due to the partial closure of the Federal government. The government’s own numbers for fourth quarter GDP scheduled for January 30th have also been delayed.

Payrolls had a strong second half in 2018. The 12-month moving average was 219,883 in December. It has been rising steadily since its three year low of 168,166 in September 2017 and has been above 200,000 since July. Manufacturing jobs have seen the largest gains in the last two years in almost 20 years and the ADP ADP factory employment numbers for January continued that trend. Wages rose 3.2% in December the best in a decade and the rise in the unemployment rate to 3.9% from 3.7% was due to large numbers of people re-entering the work force seeking jobs.

Jobless claims remain at historically low levels. The jump to 253,000 in the week ending January 26 is a product of government layoffs from the budget dispute and a statistical adjustment by the Department of Labor. The current 220,250 four week moving average is the lowest in 46 years and the 206,000 average of September 15th is the smallest in 50 years.

Retail sales were buoyant in November with the control group which is part of the government’s GDP figure up 0.9% combined with MasterCard’s 5.1% increase in year on year sales, they would seem to indicate a robust holiday season, but real numbers are lacking.

Consumer and business sentiment have declined. The University of Michigan Consumer Sentiment Index slipped to 90.7 in January from December’s 98.3, missing the 97.0 forecast.  The Institute for Supply Management’s purchasing managers’ index sank to 54.1 in December from 59.3 the month prior. January’s reading is expected to be 54.2.

The hard numbers for December and January, payrolls, wages, jobless claims and unemployment are unlikely to have shifted. They continue to indicate a healthy economy and a historically robust labor market. The drop is sentiment reading are the likely result of perceptions of the potential problems created by an extended government shutdown.

Except for the federal employees who paychecks were delayed the economic effects of the partial shutdown were minimal. Any impact on GDP would be recovered in subsequent months.

Federal Reserve Policy

The Fed has pulled back from its aggressive rate normalization policy of last year. Wednesday’s FOMC statement and Chairman Powell’s press conference outlined the new “patient” stance. The economic logic of the Fed’s new caution, however, is not based on changes in the US economy. Mr. Powell noted repeatedly that domestic growth, employment and other hard factors remain healthy.  Care stems from external risks, Brexit, the US-China trade dispute and general decline in global growth.  In those circumstances the Fed governors have elected prudence.

Conclusion

The US economy continues to prosper. The labor market is strong. Preliminary indicators for January, including ADP employment and jobless claims reinforce this picture. Any effect from the 35-day government shutdown will be transitory and recovered in pending months. The declines in consumer and business sentiment are easily reversed and do not in themselves indicate an economic slowdown. There is every reason to expect the employment and payroll picture to remain healthy.