US Non-Farm Payrolls December Preview:  All systems go

• Payrolls expected to moderate after November’s 266,000.
• Private jobs from ADP soar 202,000 in December, November revised to 124,000 from 67,000.
• Initial jobless claims fall to 224,000 in January.

The Bureau of Labor Statistics (BLS) a division of the US Department of Labor will release its Employment Situation Report for December on Friday, January 10^th at 13:30 GMT, 8:30 EDT

Forecast

Non-farm payrolls are expected to increase 164,000 in December after November’s 266,000 gain. The unemployment rate is expected to be unchanged at 3.5%. Hourly earnings will gain 0.3% following November’s 0.2% boost. Annual earnings will be stable at 3.1%. The labor force participation rate should remain at 63.2%. Average weekly hours will be unchanged at 34.4. 

The BLS Employment Situation Report

The Employment Situation Report from the Labor Department is the premier US economic statistic. It presents the most complete analysis of the American labor market and is the most widely followed statistic by traders, economists and analysts of every stripe. Commonly referred to as non-farm payrolls, NFP or payrolls for short, it is usually issued by on the first Friday on every month covering the previous month’s information.

The report’s data is secured by two separate surveys. The so-called establishment survey polls a statistical sample of non-farm businesses and asks for detailed responses on numerous employment and compensation related questions. These collated responses produce the payroll figures, wages, weekly hours, labor force participation rate and other statistics.

The household survey is briefer. It queries a number of US households and asks if the non-military working age members are working and if not when they last looked for a job.  This information produces the many BLS unemployment rates.

The unemployment rate commonly employed by analysts, economists and the media is the U-3 rate. This gauge restricts the unemployment classification to non-working people who had actively sought work in the month prior to the survey. Proof of the employment search is required. Any individual who, though unemployed, cannot document an interaction with the market is not counted as being in the labor force and thus not unemployed.

A second jobless measure, the U-6 or underemployment rate has a more expansive designation. For this classification a non-working individual had to have searched for work anytime in the prior year. This gauge is considered by many analysts to be a more accurate measure of joblessness and understandably is always several points higher than the U-3 rate.

Non-farm payrolls also includes each month an estimate for the number of jobs created by start-up companies.  As many of these concerns have not reported to the Federal government their employees are unrecorded. The BLS uses a modeling program, the so-called birth–death model, to project the number of new hires each month basing its estimates on historical economic performance.

At the end of the year The BLS compares its estimates with IRS and other government information and adjusts its numbers in accordance with facts. Adjustments have often been 500,000 a year or more. In a normal year a quarter or more of non-farm payrolls can be lost or gained in revision.

Payrolls are one of the most up to data sets being a month old.

Payrolls and GDP

Payroll growth has declined as US GDP moved lower in 2019 but the drop is relative and not indicative of waning labor market. From a 3.0% annualized expansion in the final three months of 2018 to 3.1% in the first quarter of 2019, average GDP slipped to 2.05% in quarters two and three and is tracking at 2.3% in the fourth.  Payrolls mirrored the decrease, moving from 235,000 in the 12-month moving average in January to 211,000 in April, 181,000 in August and 184,000 in November.

The US economy has between 125,000 and 150,000 new entrants to the labor force each month from population growth and immigration.  

Payroll expansion has covered the rise in the labor pool for all of the years since 2011 but it was only in August 2018, according to the Bureau of Labor Statistics, that the job losses from the recession had been made good. Until that point the number of new positions that had been created in excess of the labor force expansion had been filling the hole left by the financial crisis collapse in employment.

For the past 18 months the US economy has been drawing the long term unemployed into the working population as more jobs than available workers have been created every month.  The pace of that creation has slackened somewhat but it remains well above the level needed to maintain a tight labor market and rising wages.

NFP and ADP

Trends in the two main payroll statistics are closely correlated, though the monthly numbers occasionally diverge sharply. The private payroll figures from ADP are the best indicator for the nationwide job results. The three-month moving average for ADP was 159,000 in December, up from 99,000 in July. When the rising trend over the last five months is combined with the unexpectedly strong 202,000 total in December it is a strong signal for the December NFP result.

Reuters

Purchasing managers’ indexes

One of the puzzles of the last year was the rapid drop in business sentiment and the plunge in manufacturing sentiment in the second half of the year when compared to the empirical evidence of sustained hiring in the labor market, (see Do manufacturing and service PMIs depict the same US economy?).

Even in the manufacturing sector where the employment PMI plunged from 55.5 in January to 45.1 in December for the fifth straight month below 50 (the division between expansion and contraction), the lowest reading since January 2016 (44.6) and the second lowest since the recession, hiring never ceased.

The 12-month moving average for factory work dropped from 22,000 in January to 11,000 in September, 4,100 in October and 6,000 in November. The 3-month average has decreased from 21,000 in January to 4,000 in November. Manufacturing is forecast to add 5,000 job in December.

The overall and employment indexes in the service sector never dropped below 50 and in December were well above their earlier lows. The bulk of US jobs are found in the 85% of economic activity in this sector.

Reuters

Consumer spending and outlook

The well-known fact that the US economy is about 70% consumption is the best explanation for the maintenance of hiring despite the pronounced jitters in the executive suites and offices.  Consumer spending and sentiment held up well throughout the year supporting the economy.

Reuters

The control group of the retail spending statistics which enters into the government GDP calculation expanded 0.28% in the 12-month moving average in November and 0.27% in the six month. These are among the strongest  rates of growth in the last decade. The December figures will be issued by the Department of Commerce on January 16. A 0.3% rise is forecast in the control group.

While business leaders, managers and owners grew increasingly nervous over the year, largely over the China trade dispute and its dangerous potential for the global economy, their employment decisions were quite logically based on the actual consumer led economy. 

 Initial jobless claims

Though the four-week moving average for initial jobless claims has climbed about 12,000 to 224,000  (week of 1/4/20) since the beginning of the third quarter and about 20,000 since its 50 year low  in April 2019,  these levels cannot be considered other than proof of a remarkably strong and resilient labor market. There is no indication that employers are eliminating workers.

Conclusion and the dollar

Payrolls exhibit no inference of slackening job production. The slide in business sentiment which has been the primary negative indicator for the labor market has been a single event focused on the US-China trade dispute.  Presumably the deal to be signed on January will remove that concern from business planning even if it does not solve all of the problems between the two nations.

Coincident labor market indicators, initial jobless claims, wages, and unemployment rates and general economic factors from steady GDP growth to robust consumption all point to a continuation of the job creation rates of the past year.

With central banks from Washington to Ottawa, London to Canberra on hold, economic statistics will be the determining factor for currencies.  In that competition American labor production should soon return the gloss to the US dollar.