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Tricky January Payrolls?

Thu, Feb 1 2007, 14:42 GMT
by KBC Market Research Desk

KBC Bank

• Payrolls growth kept up well in previous months and should have done so in January too
• However, January payrolls contain an unusual high number of special factors, also of statistical nature
• Manufacturing sector probably continued to shed labour, but services compensate

Payrolls surprise positively

The economy slowed in Q2 and Q3, before posting a better performance in Q4. The jury is still out whether the Q4 result is due to special factors like weather conditions and the drop in energy prices or the start of an improvement in the underlying trend. With growth in Q2 and Q3 below trend one would expect payrolls growth to have slowed too. However, with exception of October 2006, payrolls growth exceeded 100 000 in each other month of last year. Moreover, if anything, the underlying trend even strengthened marginally, as the 6-month average stood at 161 000 in December, slightly above July’s 146 000. For the whole of 2006, a net 1.838 million jobs have been created, only slightly less than the 1.981 million in 2005 and the 2.097 million in 2004. Some time ago some Fed governors suggested that the slower growth would be reflected in a weaker labour market with a time lag that might be longer than usual. Chicago Fed Moskow, but also others, suggested that the monthly growth of the labour force might be no higher than 100 000 to 125 000. This means that the labour market even tightened slightly, and if payrolls growth would accelerate it could create inflationary pressures via wages. However, an offsetting factor has appeared in the form of a rise in the labour participation rate that rose from 66% in early 2006 to 66.4% in December.

Goods versus service sector

While overall payrolls held up well, there is a divergence growing between the goods producing and the service producing sectors. Starting with the former, payrolls growth in the manufacturing sector fell continuously since last July. In December the decline slowed to 12 000, but it is too early to look for a durable improvement. All four regional PMI surveys showed a worsening in employment conditions in January. While the ISM, to be released later today, may still influence our view, it is likely the manufacturing continued to shed jobs in January.

The construction sector started to lose jobs since September of last year. In December, the decline was minimal, probably due to the better weather conditions. The sharp slowing in the residential sector will continue to affect construction payrolls negatively. Of course, this only happens with a large time lag, as started constructions will have to be finished. However, the slowing in starts is now affecting the payrolls.

The very mild weather conditions in early January might hide the underlying deterioration. Every January, about 320 000 workers fall out of the payrolls on a non-seasonally adjusted basis. Given the weather, there should be less this year and this might result in a rise of (SA) construction payrolls. The labour market conditions kept up better in the service-producing sector, which might be partially explained by the less cyclical nature of the sector. The importance of this sector has grown steadily in the last few decades if compared to the goods-producing sector. Service payrolls growth kept up very well. Encouraging, payrolls at Temporary Help Agencies, a subsector that has a leading character, stabilized in recent months following some decline previously. Retail payrolls are always an important issue in the January report, as many workers are laid off after the Christmas shopping season (about 700 000 on a NSA basis). As the hiring of these was tepid in December, there might be less lay-offs in January, resulting in a strong rise of (SA) retail payrolls.

Other reports favourable too

The ADP report revealed a 152 000 gain in private payrolls in January, following a surprise (but distorted) 40 000 increase in December. Taking public sector employment growth in consideration, this would translate in a rise in payrolls of about 170 to 175 000. Initial claims in the payrolls survey week amounted to just 290 000, down from 316 000 in the survey week for the December report. While the weather might have distorted the claims figure, the same might have happened in the payrolls.

Statistical pitfalls

In January the statisticians of the BLS revise the payrolls for a number of specific reasons. Firstly, there is the annual benchmarking for the period of April 2005 to March 2006. In October, the BLS put provisionally the revision at + 810 000, but it seems to be slightly lower. This will raise the level of payrolls of March 2006, but also the various months since April 2005. Secondly, there is the postbenchmark revision of the data between April 2006 and October 2006 and the usual revision for the two most recent months on the basis of the late responses of the respondents. The BLS will also incorporate new estimates for the population into the data from the household report.

Forecasters have difficult job

Forecasters have a very difficult job when looking to the January data. The huge seasonal adjustment factors and the high number of revision have resulted in a very bad track record for the January payrolls, the second worst of the year (after February). In the previous 10 years, the standard forecast error for January is 123 000, sharply higher than the average standard error (82 400).

Conclusion

The January payrolls report should be a good one, supported by a number of special factors. Our bias is for an above-consensus estimate. However, there are so many statistical issues that it might be a complete surprise in both directions. Forecasters have traditionally done a lousy job in forecasting the results. It will also be very difficult to interpret the figures on the release itself. This might also impact market reactions and turnarounds in directions some minutes after the release are a possibility.

Market reactions

In the bond market, the sell-off that started in early December has reached some critical technical levels. There were some signs yesterday that the sell-off phase is over for now. The stronger Q4 GDP failed to push Treasuries lower and after the FOMC statement, a small short covering rally took place. With rate cuts almost priced out, also from a fundamental point of view, the market is better positioned. However an iron-strong report might be the final straw that breaks the Camel’s back and kill the latest hope on a rate cut. More likely, if the report is weak, a short covering rally in an oversold market may take place. Even an as expected report might help Treasuries creep away from these key levels in a corrective move.

Regarding the dollar, EUR/USD is currently in a 1.2865 to 1.3050 range. While we are close to the top of the channel, we are sceptical whether the payrolls report has the ability to push the currency out of this band in a sustained fashion.

Published on  Thu, Feb 1 2007, 14:51 GMT

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