Non-Farm Payrolls Preview: Is the equity gloom on the US economy warranted?

The US Labor Department will issue its Employment Situation Report on Friday January 4th at 8:30 am EST, 13:30 GMT. Also known as the non-farm payrolls report for its closely watched statistic on new employment, the monthly report covers the condition of the US labor market with information on job creation, two unemployment rates, average hourly earnings, labor force participation and other pertinent statistics. The headline payroll number is currently the most widely followed and reported American economic statistic.

Forecast

Non-farm payrolls are predicted to increase by 177,000 in December, an improvement on November's 155,000 but below the six month average of 213,000.  The unemployment rate is expected to be unchanged at 3.7%.  Average hourly earnings are thought to have increased 0.3% on the month and 3.0% on the year compared to 0.2% and 3.1% in November. Average weekly hours could rise 0.1 to 34.5.as in November.

US Economy: Don't look back they might be gaining

Growth in the US in first three quarters averaged 3.3% annualized, the best in over a decade. The latest Atlanta Fed GDPNow estimate puts the fourth quarter at 2.7% which would leave the year at 3.125%, also the strongest over the last ten years.  Monthly payroll additions have averaged 205,000 in the first eleven months, well ahead of the 75,000-100,000 needed to absorb new entrants into the labor force. The unemployment rate of 3.7% since August and 3.92% over the past year is the lowest the US economy has seen in over a generation. 

Retail sales in November, particularly the crucial control group at 0.9% which enters into the government's GDP calculation and MasterCard’s report of a 5.1% increase over last year in holiday sales would seem to indicate optimistic US consumers are willing to spend wages gains and confident about a secure job market. Consumer and business confidence readings have remained at some of their highest levels since the financial crisis despite the dramatic fall in equity prices and various political disturbances in Washington DC, China and Europe. 

Consumer sentiment in the Michigan Survey rose unexpectedly to 98.3 in December from November's 97.5 and though attitudes have moderated from March's record 101.4, scores this year have been among the best of the past 20 years.  One of the drivers of positive consumer emotions has been the recent rise in wages. Annual hourly earnings were at 3.1% in October and November, the highest compensation in nine years. Another plus for the consumer economy has been moderate inflation.  The overall annual consumer price index was 2.2% in November and the core PCE index was 1.9%. No inflation measure shows the typical late cycle gathering pressures as the labor market bumps against availability constraints.

 Nonetheless there are persistent worries about slowing global economic growth.  One aspect of which is the sharp drop in many Chinese statistics coincident if not specifically traceable to the trade dispute with the United States, another is the continuing European drag from the unsolved Brexit puzzle, Italy's Pyrrhic budget victory and France's fuel tax debacle. These concerns have been reflected in the end of year losses for the equity averages which are weighted to larger corporations with heavy international exposure. The Dow was off 13% from its October highs at Wednesday’s close and the S&P 500 had shed 15%. 

Equity concerns are two-fold. Can the US sustain its aging expansion particularly if growth in the other two largest economic blocs, China and the EU is fading?  Will domestic economic activity slip back to the 2% mark as the effects from 2017's tax bill begin to wane?  It is as yet unclear if the decline from 4.2% growth in the second quarter to sub-3% in the last is evidence of an unstainable one time boost or a new higher median. 

The US consumer, responsible for about 70% of domestic economic activity combined with the United States' weak incidence of exports relative to the size of its economy has historically served to insulate it somewhat from economic turmoil elsewhere. Equities wonder, along with many economists and analysts, whether this is still true.

Another uncertainty is the final disposition of the US China trade dispute. Were this to be settled to the benefit of both economies it would allay most fears about global growth in the next two years. 

Federal Reserve Policy

The Fed has already given voice to some of these concerns in its December economic and rate projections. Prospective rate increases in 2019 have dropped to two from three with a terminal Fed Funds rate at 2.9% rather than 3.1%.  Economic growth in 2018 has slipped to 3% from 3.1% in the September materials and to 2.3% from 2.5% this year. These are the first negative adjustments to the Fed projections in over two years.  Chairman Powell mentioned overseas growth as one of the Fed's concerns in his news conference after the FOMC had increased the Fed Funds rate 0.25% to 2.5%, the fourth hike in 2018. 

A strong report and employment will help confirm Fed policy that two hikes for 2019 not one was the prudent choice.. 

The US Dollar 

The greenback has profited from risk averse flows towards the year end as equity losses and gloomy economic prognostications led traders to safety. A good US employment report will allay some of the contaigion fears for the US economy and offer the dollar support in the shape of a more aggressive Fed.  But the key for the dollar, the US economy and US equities is a trade agreement with China.  With a trade deal all three will gain as will the mainland economy and the rest of the world can enjoy the ride. But if by mid-year there is still no deal the impact on US and Chinese growth could lead the world to recession.