US Non-Farm Payrolls Preview: Gathered clouds

The Bureau of Labor Statistics (BLS) a division of the US Department of Labor will release its Employment Situation Report for September on Friday October 4 at 12:30 GMT, 8:30 EDT.

Forecast

Non-farm payrolls are predicted to rise by 145,000 in September following August’s 130,000 gain. The unemployment rate should be unchanged at 3.7%. Average hourly earnings will rise 0.3% on the month and 3.2% on the year as in August. Average weekly hours will be stable at 34.4.

FXStreet

The Employment Situation Report

Non-farm payrolls or NFP are the colloquial terms for the US Labor Department’s Employment Situation Report its monthly catalogue of the state of the American labor market. It is the most extensive assessment and the most widely followed and influential set of American economic statistics.

The report is based on two surveys. The establishment side polls non-farm businesses and produces the payrolls numbers, wages, weekly hours, labor force participation rate and other statistics.

The household survey asks a statistically representative portion of the non-military working age population if the individual is employed or unemployed and when they last looked for a job. The answers produce the unemployment rates.

The U-3 unemployment rate is the gauge commonly quoted by analysts and in the media. Under this estimate unemployment is limited to non-working individuals who have searched for work in the month prior to the survey.  A person who is not employed or unemployed under the U-3 definition is not counted in the workforce

The U-6 or under-employment rate considers anyone who has looked for a job within a year and desires to work as unemployed. Its wider and more realistic criteria are considered by many economists a more accurate measure of unemployment.

The non-farm payrolls figure incorporates a BLS projection for the number of jobs created in the survey month but unreported to government sources. The employment numbers generated by this so called birth-death model, are conjecture and revised at a later date against company and government information in the annual baseline revision.

Payrolls information is one of the most timely government statistics as its data is about one month old.

Non-Farm Payrolls and the economic background

The US economy has slowed this year. Growth has declined from 3.1% in the first quarter to 2.0% in the second and is tracking at 1.8% in the current three months according to the GDPNow model from the Atlanta Federal Reserve.

Payrolls have declined in concert.  The 3-month moving average for non-farm payrolls has fallen from 245,000 in January to 156,000 in August. If the forecast for 145,000 in September is accurate the average will also be 145,000.  Private payrolls from ADP have fallen from 244,000 in February to 145,000 in September.

The yearlong decrease in business sentiment in the manufacturing and services sectors has transferred into hiring decisions.

The purchasing managers’ index in manufacturing has plunged from 60.8 in October 2018 into contraction at 49.1 in August and then 47.8 in September.  Attendant indexes in employment and new orders are trending lower and at 46.3 and 47.3 are well below the 50 division between expansion and contraction. Though manufacturing is only about 12% of US GDP the long-term planning required of production makes the sector a leading indicator for the overall economy.

While the index for the larger services sector remains in expansion it has fallen from 60.8  last September to 52.6 last month and its components are equally weaker, employment at 50.4  from 53.1 and new orders at 53.7 from 60.3 in August.

The drag from the two year old China trade dispute is beginning to spread from the manufacturing sector to the general economy though it has not as yet affected consumption and its 70% of GDP.

Employment statistics and consumption

The sharp decrease in new payrolls this year has not damaged the consumer.  Hiring, even with payrolls at 145,000 per month is sufficient to occupy new entrants to the labor market and when aligned with the two year backlog of unfilled positions it will keep labor shortage and wages pressures intact.

If firms have curtailed hiring they have not begun to lose employees. Unemployment and initial jobless claims have remained near their five decade lows. Though both are lagging indicators, there is as yet no suggestion that companies are reducing payrolls to conserve dwindling revenue.

Retail sales have been robust with the six months to August registering the highest average consumption in 16 years.  

Consumer sentiment has fallen sharply in August and September in the Michigan and Conference Board Surveys and if it is at the lows of the last two years it is still above all reading of the past decade.

Reuters

Conclusion

Has the US economy entered a slowdown that will inevitably lead to a recession?

The indicators for a slowdown are unmistakable but they are not all-encompassing. Job creation has declined, though by historical standard it is still enviable. Business sentiment under the flail of the US China trade war has been severely damaged with firms unwilling to spend on capital improvement though they remain curiously eager to hire. 

Retails sales have been strong as wages and low inflation have provided a surge in disposable income.  The indicators of imminent trouble in the labor economy, initial jobless claims and the unemployment rate do not signal problems ahead.

Manufacturing PMI is a good but not infallible recession indicator. The index had fallen below 50 twice since the recession, in November and December 2012 and for five months from October 2015 to February. Both times the service sector did not follow manufacturing into contraction nor did GDP turn negative.

Reuters

Another contrary recession indicator is the 2-10 Treasury spread. Since inverting briefly in late August with the widest reverse spread on August 27 at 5 points, the rates have moved sharply in the opposite direction. As of this writing the spread is 16 points not far from the normal divergence.

Reuters

For the past six month the US economy has been preforming to the standards of a healthy consumer and an inert business sector. A GDP expansion of about 2% is commensurate with that scenario.

The six month average for NFP of 150,000 is par for that economy. It should continue.