US Non-Farm Payrolls February Preview: The first facts

• February payrolls expected to be at trend with 175,000.
• ADP employment 183,000, January revised to 209,000 from 291,000.
• Employment PMIs in services and manufacturing improve.

The Bureau of Labor Statistics (BLS) a division of the US Department of Labor will issue its Employment Situation Report for February on Friday, March 6 at 13:30 GMT, 8:30 EDT

Forecast

Non-farm payrolls are expected to rise by 175,000 in February following January’s 225,000 increase. The unemployment rate is expected to be unchanged at 3.6%. Hourly earnings will rise 0.3% after January’s 0.2% gain. Annual earnings should increase 3% following 3.1% in January.  Average weekly hours will be stable at 34.3. 

 The BLS Employment Situation Report

The Employment Situation Report from the Labor Department provides the most detailed statistics on the US labor market. Normally referred to in shorthand as non-farm payrolls, NFP or payrolls, it is released on the first Friday of every month.

The report’s information comes from two separate surveys. The establishment survey polls a sample of non-farm businesses and asks a series of employment and compensation related questions. The answers produce the payroll figures, wages, weekly hours, labor force participation rate and other statistics.

The household survey is shorter. It asks a statistically representative sample of US households if the non-military working age members are employed and if not when they last looked for a job.  This information provides the basic data for the many BLS unemployment rates.

The unemployment rate most commonly quoted by journalists and the media is the U-3 rate. This measure restricts the unemployed designation to non-working people who had actively sought work in the month prior to the survey. A jobless individual who did not look for work in the prior month is not counted as being in the labor force and thus is not considered unemployed.

A second jobless measure, the U-6 or underemployment rate is considered by many analysts to be a more accurate measure of joblessness.

This gauge includes as unemployed any non-working individual who had searched for work in the prior year. This rate is normally several points higher than the U-3 rate. In January the U-3 rate was 3.6% and the U-6 rate was 6.9%.

Non-farm payrolls also incorporates an estimate for the number of jobs created by new businesses.  Many of these firms will not have reported to the Federal government and their employees will not show up in government statistics. The BLS uses a modeling program, the dramatically named birth–death model, to predict the number of new hires each month basing its figures on historical precedents.

At the end of the year the BLS compares its estimates of new firm hires with tax and other government information and revises its numbers in accordance. Revisions 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.

NFP and ADP

Automatic Data Processing is a private payroll processing company and its information is limited to its client’s actual employees.  The BLS figures are national and include government employment at all levels and the estimated jobs mentioned above.

The performance of the two payroll statistics are well correlated, though the monthly numbers normally diverge several times a year.

ADP had a three month moving average of 186,000 in February and a 12-month average of 157,000.  The latter has declined slightly since last January from 171,000.  The variation in the 12-month was from 171,000 as noted to 149,000 in October.

ADP Payrolls

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The three-month average for NFP was 211,000 in January and the 12-month was 171,000. That average has decreased from 206,000 last January.

NFP

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From January 2019 to February 2020 the ADP 12-month average had declined 8.2%. Over the 13 months from January 2019 to January 2020 the NFP 12-month average was down 17%.

Purchasing managers’ indexes

The surprise in the January manufacturing purchasing managers’ index was not that the overall reading fell to 50.1 from 50.9, sentiment was bound to suffer from the closure of parts of China’s economy but that the employment index rose to 46.9 from 46.6.  This measure has been contracting since August, the low was 45.2 in December.

Sentiment in the economically dominant service sector was better than forecast in February with the general index rising to 57.3 from 55.5 easily beating the 54.9 consensus estimate. Employment was also stronger than projected at 55.6, up from 53.1 and ahead of the 54.1 prediction.  The new orders index jumped to 63.1 its highest reading since June 2018, from 56.2 in January. The forecast was 54.1.

The resilience in the manufacturing PMI, the small but unanticipated gain in the employment index and the improvement in the three services indexes argues that the disruption from the Coronavirus has not had a major impact on US business sentiment.  That may lie ahead, but for February businesses were still planning for a stronger economy.

The Atlanta Fed GDPNow estimate for the first quarter annualized growth was 2.7% on March 2.  It will be updated after the NFP report.

Initial jobless claims and unemployment

Claims have been near a half century low for more than a year as has the U-3 unemployment rate.  The first means that when and if workers change jobs it is voluntary and they are moving to new employment. The second implies that the tight labor market will continue to support wage gains and draw the long-term unemployed into the work force.

Reuters

Conclusion: Credit, equities and the dollar

Anticipation that the shutdown of parts of China’s economy and the continuing spread of the Coronavirus will have drastic effects in the US remained, at least in the statistics for February, speculation.  Purchasing managers indexes for the 85% of GDP connected to the service sector, including the employment gauge, improved on the month. The ADP employment report was at trend and initial jobless claims continued to signal a healthy labor market.

With small numbers of new cases of the generally mild infection being reported daily, largely on the coasts, the future course of the virus and the economy are up for intense market speculation.

Credit markets and equities are discounting for major problems for the US and the world in the months ahead.  The record lows in US Treasury yields are an indication of the degree of uncertainty around the immediate future and the overwhelming desire to house financial assets in the United States.  These yields are the primary logic behind the dollar’s fall in the last two weeks.  

The February employment report will begin to replace concern with fact though many of the hiring decisions reflected in the report will have been made before the virus became a global concern. The reports for March and April will be more telling.   Are businesses beginning to retrench in the face of the unknown?