March Payrolls Preview: Watch For Another Jump In Hourly Earnings

Original post

The BLS will release the March Payrolls Report at 0830EDT on 6th April 2018: recent macroeconomic data raises hopes for another solid month of payrolls growth, while wage growth is expected to pick up before faster growth towards the end of the year.

Job growth accelerated in the last three reports (to +242k compared to +182k in 2017, on average), and both ADP private payrolls and the majority of employment surveys remained strong or improved further in March.  Both initial and continuing jobless claims fell to new cycle lows in the weeks leading up to the March payroll reference period. Offsetting this will be a swing towards unfavorable weather will weigh on job growth, with a drag from unseasonably high snowfall of between 30k and 60k (relative to trend). Consensus expects around 185K new jobs added.

While attention will once again be focused squarely on the avg hourly earnings number – where consensus expects a strong 0.3% M/M pick up and a 2.7% Y/Y increase reflecting favorable calendar effects (the survey week ended on the 17th – a lingering question is whether the unemployment rate, expected to drop to 4.0%, will actually dip to a 3-handle, which of course is painfully considering there are 95 million Americans not in the labor force, also known as “record slack”, and is the main reason why wages will not rise for a long, long time.

Here is a snapshot of what to expect courtesy of RanSquawk

• Nonfarm Payrolls: (Exp. 185k, Prev. 313k)
• Unemployment Rate: (Exp. 4.0%, Prev. 4.1%)
• Average Earnings Y/Y: (Exp. 2.7%, Prev. 2.6%)
• Average Earnings M/M: (Exp. 0.3%, Prev. 0.1%)
• Average Work Week Hours: (Exp. 34.5hrs, Prev. 34.5hrs)
• Labour Force Participation: (Prev. 63.0%)

PAYROLL TRENDS: Trend rates remain firm, particularly after last month’s largest gain in payrolls in 18 months. Payroll growth has averaged 190k/month over the last 12-months, 205k/month over the six-months, and 242k/month over the last three-months, and the consensus view expects 195k in February.

PAYROLL GROWTH: ADP reported another solid increase in March (241k vs. expected 205k; previous also revised 11k higher to 246k). However, as is often the case, it’s worth taking this figure with a pinch of salt. “The ADP survey is not a great leading indicator for payrolls, not least because it is partly based on lagged changes in payrolls,” writes Capital Economics. “Nevertheless, to the extent it is useful, it points to a labour market still in exceptionally good health.”

EARNINGS GROWTH: Average hourly earnings are expected to increase 0.2% M/M, taking the Y/Y growth rate up to 2.7% from 2.6% last month. Capital Economics note that the share of small firms reporting they plan to raise compensation currently sits at an 18-year high, suggesting that a firmer pick up in wages could be just around the corner. Further supporting earnings this month could be a calendar quirk. “The 15th of the month fell within the payrolls survey week in March, which is historically associated with some upside bias in the month-over month change in AHE relative to the prior month,” writes Morgan Stanley.

BUSINESS SURVEYS: The employment components of the two ISM surveys were again consistent with strong job growth. The manufacturing survey saw the employment component rise to 57.3 from 54.5 and the non-manufacturing survey rose to 56.6 from 55.0.

UNEMPLOYMENT CLAIMS: In the survey week – the week that includes the 12th March – initial jobless claims increased to 229K although those continuing to claim fell to 1.828mln and remained near multi-decade lows.

OTHER FACTORS: This month weather could have impacted the sampling process this month. “The third of four Nor’easters hit during the March survey period (the week that includes the 12th of the month), dumping multiple feet of snow in New England,” writes RBC. “Therefore, we would take hour and labour force flows with a grain of salt.” That being said, the poor weather should not have impacted the headline payroll count numbers. Capital Economics note that February’s mammoth gain would have been even stronger were it not for the worst flu season in almost a decade and they expect to see some boost from the fading flu epidemic in March.

MARKET REACTION: As is often the case, the market will first likely first move on the payrolls headline. A stronger than expected number should cause strength in the USD and rates to move lower, and vice-versa for a lower than expected figure. However, with earnings growth a prerequisite for further Fed rate hikes, focus should turn to the details of the report. If wage growth exceeds estimates it could see markets begin to price in more rate hikes this year, with markets currently only pricing in an approximately 30% chance of three further rate hikes in 2018.

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Next, Goldman breaks out the factors arguing for a stronger, weaker or neutral report.

  • Jobless claims. Initial jobless claims fell to a new cycle low during the four weeks between the payroll reference periods (225k vs. 228k for February and 241k for January). Additionally, continuing claims resumed their downtrend, falling at their fastest pace between the survey periods in nearly a year (-50k).
  • Service-sector surveys.  Service-sector employment surveys improved on net in March, and our non-manufacturing employment tracker rose 0.9pt to 56.9, a 4½-year high. This improvement was also broad-based, with increases in five of the six business-survey measures we track in the sector. In particular, the ISM non-manufacturing employment component rebounded 1.6pt to 56.6. Additionally, 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 to a new 16-year high (+1.0pt to +25.0). Service-sector job growth picked up to 187k in February and has increased 137k on average over the last six months.
  • ADP. The payroll processing firm ADP reported a 241k increase in March private payroll employment, 31k above consensus expectations and its fourth consecutive reading above 240k. While we expect a larger drag from winter weather in the BLS payrolls measure—reflecting differences in methodology—the continued strength in the ADP data is consistent with our view that the underlying pace of job growth has probably accelerated.
  • Job postings. The Conference Board’s Help Wanted Online (HWOL) report showed a 2.2% increase in online job postings (mom sa), retracting over half of its February decline (which itself followed four consecutive increases). However, we place limited weight on this indicator, in light of research by Fed economists that suggests the HWOL ad count has been depressed by higher prices for online job ads. The Conference Board is currently reviewing its methodology accordingly.

Arguing for a weaker report:

  • Weather. NOAA weather-station data indicate that snowfall was unusually high in March (on a population-weighted basis), and this followed unseasonably mild weather in February. While most of the accumulation occurred outside of the survey  week, we nonetheless expect the incremental swing in snowfall to weigh on job growth, with an impact of between -30k to -60k relative to trend (see Exhibit 1, right axis is inverted). One mitigating factor here is that much of the survey-week snowfall occurred in New England and upstate New York, regions more accustomed to severe winter weather.
  • Retail employment. Despite weak retail sales results in the first two months of the year, retail payrolls rose 50k in February, a sharp acceleration from its prior 6-month trend (of +5k on average). We believe this strength reflected a favorable swing in the weather as opposed to an underlying pickup in labor demand. Accordingly, a flat or down March reading appears probable.

Neutral factors:

  • Manufacturing-sector surveys. Headline manufacturing-sector surveys generally weakened in March, but the employment components were more mixed. Our manufacturing employment tracker edged down 0.2pt to 59.5, still an elevated level consistent with a solid pace of job gains in that sector. While the steel and aluminum tariffs announced by the Trump administration could potentially weigh on hiring in affected industries (due to increased uncertainty) 1, we note that the more recent escalation in trade tensions to a broader set of industries was announced after the March survey period. Manufacturing payroll employment rose 31k in February and has increased by 25k on average over the last six months.
  • Job cuts. Announced layoffs reported by Challenger, Gray & Christmas rebounded 21k to 54k in March (SA by GS), a two-year high. On a year-over-year basis, announced job cuts increased 14k. However, these increases were concentrated in  the retail industry (35k layoffs, NSA) and likely reflected the announced Toys ‘R’ Us liquidation—which had not started as of the March reference period (this retailer currently employs 31,000 workers).

Finally, some additional thoughts on the most important aspect of tomorrow’s report – hourly earnings – from Goldman.

We estimate average hourly earnings increased 0.3% month over month, reflecting somewhat favorable calendar effects (the survey week ended on the 17th). We also note that last month’s month-over-month increase (+0.15%) was dragged down by a sharper-than-usual drop among supervisory employees, a relatively mean-reverting subset (in contrast, production and nonsupervisory average hourly earnings increased 0.27%). Additionally, to the extent that the increase in the February workweek (+0.1 to 34.5 hours) weighed on wage growth, this would suggest scope for mean-reversion in March (the workweek is now at a 2-year high). Taken together, we estimate a 0.3% month-over-month gain that pushes up the year-over-year rate a tenth to 2.7%.

Whether this rise in earnings, together with the latest round of Trump’s trade war will be enough to unleash another market crash, we’ll find out shortly.